On December 31,2010,Malcolm Corporation accrued interest on a $10,000 note payable that it had issued on March 1,2010.The note was a 1-year note with interest at 6%.How did the year-end accrual of interest affect Malcolm's financial statements?

Question

Quizplus · Accepted Answer

The year-end accrual of interest on the note payable would increase Malcolm Corporation's liability for the note payable by adding the interest accrued but not yet paid to the principal amount. This would result in an increase in both the company's liabilities and its interest expense on the income statement. The effect on the balance sheet and income statement would be reflected as follows:

Balance Sheet:

Liabilities
Note Payable (as of 12/31/2010) $10,600 ($10,000 original principal + $600 accrued interest)

Income Statement:

Interest Expense $600 (the amount of interest accrued at year-end)

On December 31,2010,Malcolm Corporation Accrued Interest on a $10,000 Note