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On January 1, Year 1, Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $81,150.

-Which of the following shows the effects on the elements of the financial statement of the cash payment on December 31,Year 1?

A)Option A
B)Option B
C)Option C
D)Option D

Question

[The following information applies to the questions displayed below.]

On January 1, Year 1, Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $81,150.

-Which of the following shows the effects on the elements of the financial statement of the cash payment on December 31,Year 1?

A)Option A 
B)Option B 
C)Option C 
D)Option D

Quizplus · Accepted Answer

The cash payment will decrease assets (cash),decrease liabilities (installment notes payable)for the amount of the principal repayment,and decreases stockholders' equity (retained earnings).It increases expenses (interest expense),which decreases net income.The principal repayment is reported as a cash outflow for financing activities,while the interest payment is reported as a cash outflow for operating activities.

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