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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.

-After accruing all interest expense due as of April 1,Year 1,Baltimore Company made the cash payment for the full amount due (i.e. ,principal and interest)to Bank of the Chesapeake.How does the cash payment affect the elements of Baltimore's 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.

-After accruing all interest expense due as of April 1,Year 1,Baltimore Company made the cash payment for the full amount due (i.e. ,principal and interest)to Bank of the Chesapeake.How does the cash payment affect the elements of Baltimore's financial statements?

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

Quizplus · Accepted Answer

The maturity date of the note is April 1,Year 1.At maturity,since all interest has been accrued through that date,the discount account has been reduced to zero,so the carrying value of the liability is equal to the note's face value.At maturity,the face value of the note of $9,000 is repaid,which decreases assets (cash)and liabilities (notes payable).However,only the amount initially borrowed of $8,550 is reported as a cash outflow for financing activities;the amount of the discount that is paid of $450 is reported as an operating activity since it represents interest expense.

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