Question

On September 1, Year 1 Gomez Company borrowed $36,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the accrual of interest expense in Year 1 will effect Gomez’s financial statements?

A) $600 interest expense and zero cash outflow from operating activities

B) $600 interest expense and $1,800 cash outflow from operating activities

C) $1,200 interest expense and zero cash outflow from operating activities

Answer 1

Interest expense on borrowing = 36,000 x 5% x 4/12

= $600

Hence, accrual of interest expense in year 1 will have the following affect on financial statements:

$600 interest expense and zero cash outflow from operating activities.

Correct option is A.

Since interest has not been paid, thus there is no outflow of cash.

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