Grove records the first year's interest payment on December 31, 2013. Commerce's prime rate is 4% for 2013. Which of the following answers shows the effect of this event on the financial statements?

Question

Quizplus · Accepted Answer

Interest expense = $1,000 principal balance x (4% + 1%) = $50; The interest payment decreases assets (cash) and increases expenses (interest expense), which decreases net income and equity. It is reported as a cash outflow for operating activities on the statement of cash flows.

Grove Records the First Year's Interest Payment on December 31