Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. How will the adjustment, dated December 31, Year 1, to record accrued interest expense impact the financial statements? Multiple Choice Decrease assets and decrease retained earnings by $2,000 Increase liabilities and decrease stockholders' equity by $1,600 Increase liabilities and decrease stockholders' equity by $2,000 Decrease stockholders' equity and increase liabilities by $4,800

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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**Scenario:**

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. How will the adjustment, dated December 31, Year 1, to record accrued interest expense impact the financial statements?

**Multiple Choice Options:**

1. Decrease assets and decrease retained earnings by $2,000

2. Increase liabilities and decrease stockholders’ equity by $1,600

3. Increase liabilities and decrease stockholders’ equity by $2,000

4. Decrease stockholders’ equity and increase liabilities by $4,800

**Explanation:**

This question relates to the accounting treatment of accrued interest expenses on a note payable. Since the note was issued on August 1 and the interest rate is 12% annually, the interest for the period from August 1 to December 31 (5 months) needs to be calculated and recorded. The appropriate treatment involves recognizing the accrued interest as an increase in liabilities and a decrease in equity, reflecting the expense incurred.
Transcribed Image Text:**Scenario:** Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. How will the adjustment, dated December 31, Year 1, to record accrued interest expense impact the financial statements? **Multiple Choice Options:** 1. Decrease assets and decrease retained earnings by $2,000 2. Increase liabilities and decrease stockholders’ equity by $1,600 3. Increase liabilities and decrease stockholders’ equity by $2,000 4. Decrease stockholders’ equity and increase liabilities by $4,800 **Explanation:** This question relates to the accounting treatment of accrued interest expenses on a note payable. Since the note was issued on August 1 and the interest rate is 12% annually, the interest for the period from August 1 to December 31 (5 months) needs to be calculated and recorded. The appropriate treatment involves recognizing the accrued interest as an increase in liabilities and a decrease in equity, reflecting the expense incurred.
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Financial statements are written reports are created by a company's management to summarize the business financial condition over a certain period.

In other words, They are set of documents that show your company's financial status at a specific point of time.

 

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