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Effects of recognizing accrued interest on financial statements

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Scott Perkins started Perkins Company on January 1, 2005. The company experienced the following events during its first year of operation.
1. Earned $1,500 of cash revenue for performing services
2. Borrowed $2,400 cash from the bank
3. Adjusted the accounting records to recognize accrued interest expense on the bank note, issued on Aug 1, 2005, had a one year term and a 7 percent annual interest rate.

A. What is the amount of interest expense in 2005?
B. What amount of cash was paid for interest in 2005?
C. Use a horizontal statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. Indicate weather the event increases (I), decreases (D), or does not affect (NA) each element of the financial statements. In Cash Flows column, designate the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA).

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Solution Summary

Scott Perkins started Perkins Company on January 1, 2005. The company experienced the following events during its first year of operation.

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Adjustments to income statement and balance sheet

Attached is the example Income Statement and Balance Sheet for the problem....

Make corrections and adjustments to income statement and balance sheet. Big Blue Rental Corp. provides rental agent services to apartment building owners. Big Blue Rental Corp.'s preliminary income statement for August, 2009, and its August 31, 2009, preliminary balance sheet did not reflect the following:

a. Rental commissions of $1,000 had been earned in August but had not yet been received from or billed to building owners.
b. When supplies are purchased, their cost is recorded as an asset. As supplies are used, a record of those used is kept. The record sheet shows that $720 of supplies were used in August.

c. Interest on the note payable is to be paid on May 31 and November 30. Interest for August has not been accrued--that is, it has not yet been recorded. (The Interest Payable of $160 on the balance sheet is the amount of accrued liability at July 31.) The interest rate on the note is 10%.

d. Wages of $520 for the last week of August have not been recorded.

e. The Rent Expense of $2,040 represents rent for August, September, and October, which was paid in early August.

f. Interest of $560 had been earned on notes receivable but has not yet been received.

g. Late in August, the board of directors met and declared a cash dividend of $5,600, payable September 10. Once declared, the dividend is a liability of the corporation until it is paid.


a. Using the columns provided on the income statement and balance sheet for Big Blue Rental Corp., make the appropriate adjustments/corrections to the statements, and enter the correct amount in the Final column. Key your adjustments /corrections with the letter of the item in the preceding list. Captions/account names that you will have to use are on the statements.

b. Consider the entries that you have recorded in your answer to part a. Using these items as examples; explain why adjusting entries normally have an effect on both the balance sheet and the income statement.

c. Explain why the Cash account on the balance sheet is not usually affected by adjustments. In your answer, identify the types of activities and/or events that normally cause the need for adjustments to be recorded. Give at least one example of an example of an adjustment (other than those provided in the problem data).

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