On September 1, 2013, the Ling Company purchased equipment making a down payment of $5,500 cash and signing a one-year note payable on the $12,500 balance. The note carried an interest rate of 6%, and all interest was to be paid on the maturity date. Which of the following correctly shows the combined effect of the purchase as well as the accrual of interest on December 31, 2013?

Question

Quizplus · Accepted Answer

Four months of interest expense ($12,500 x 6% x 4/12) is reported on the income statement, but the interest is not reported on the statement of cash flows because it is not paid in 2013. The $5,500 cash paid toward the equipment is reported as a cash outflow for investing activities.

On September 1, 2013, the Ling Company Purchased Equipment Making