Question

On October 1, 2014, Balkan, Inc. accepted from another corporation a 1-year note receivable in the amount of $15,000, with an interest rate of 6%. On December 31, 2014, Balkan accrued the interest income earned to date. How did this accrual affect Balkan's financial statements

Answer 1

Balkan, Inc

The accrual effects on Balkan's financial statements are:

1. Income Statement: The interest income is increased by $225.

2. Balance Sheet: The current assets (interests receivable) are increased by $225.

3. Statement of Cash Flows: The operating cash flow is reduced by $225.

Step-by-step explanation:

a) Data and Calculations:

Note receivable accepted on October 1, 2014 = $15,000

Interest rate on the note = 6%

Interest accrued on December 31, 2014 = $225 ($15,000 * 6% * 3/12)

Under the indirect method of preparing the Statement of Cash Flows, when a current asset increases, it signifies the use of funds (non-collection of funds).