Question

Return to question Item 10 Item 10 Part 2 of 6 10 points

Required information
On August 1, Year 1 Hernandez Company loaned $48,000 cash to Acosta Company. The one-year note carried a 5% rate of interest. Which of the following shows how the December 31, Year 1 recognition of accrued interest will effect Hernandez's financial statements?



Balance sheet Income Statement Statement of Cash Flows
Assets = Liab. + Equity Rev. − Exp. = Net Inc.
A. 1,400 = NA + 1,400 1,400 − NA = 1,400 1,400 OA
B. 1,400 = NA + 1,400 1,400 − NA = 1,400 NA
C. 1,000 = NA + 1,000 1,000 − NA = 1,000 1,000 OA
D. 1,000 = NA + 1,000 1,000 − NA = 1,000 NA

Answer 1

The recognition of accrued interest will affect Hernandez Company's Income Statement and Statement of Cash Flows.

Step-by-step explanation:

The recognition of accrued interest in Hernandez Company's financial statements on December 31, Year 1 will affect the Income Statement and the Statement of Cash Flows.

On the Income Statement, the accrued interest will be recognized as Revenue. This will increase Hernandez's Net Income. On the Statement of Cash Flows, the accrued interest will be recorded as an Operating Activity. The cash received from Acosta Company as interest will increase Hernandez's Cash Flow from Operating Activities.