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Baltimore Company issued a $9,000 face value discount note to Bank of the Chesapeake on March 1, Year 1. The note had a 5% discount rate and a one-year term to maturity.

-How would the adjusting entry to record interest expense on December 31,Year 1 affect the elements of the financial statements?

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

Question

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

Baltimore Company issued a $9,000 face value discount note to Bank of the Chesapeake on March 1, Year 1. The note had a 5% discount rate and a one-year term to maturity.

-How would the adjusting entry to record interest expense on December 31,Year 1 affect the elements of the financial statements?

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

Quizplus · Accepted Answer

Discount = $9,000 × 0.05 × 1 = $450
Ten months (Mar.1-Dec.31)have passed.
Year 1 interest expense = Amortization of discount = Discount of $450 × (10 ÷ 12)= $375
The entry increases liabilities (by decreasing discount on notes payable,a contra liability account)and decreases stockholders' equity (retained earnings).It increases expenses (interest expense),which decreases net income.

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