On October 1, Year 1, Blake Company loaned $18,000 to Jimenez for 8 months at 6% interest.Required:a) How will Blake report the note and interest on its Year 1 income statement, balance sheet, and statement of cash flows?b) How will Blake report the note and interest on its Year 2 income statement and statement of cash flows?
What will be an ideal response?
a) In Year 1, Blake will report $270 of interest revenue on its income statement, an $18,000 note receivable and $270 interest receivable on its balance sheet, and an $18,000 cash outflow for investing activities on its statement of cash flows.
b) In Year 2, Blake will report $450 of interest revenue on its income statement, and an $18,000 cash inflow from investing activities on its statement of cash flows, and a $720 cash inflow from operating activities on its statement of cash flows.
a) At the end of Year 1, Blake will record an adjusting entry that includes a debit to Interest Receivable and a credit to Interest Revenue for $270, calculated as follows:
Interest revenue = Principal of $18,000 × Annual interest rate of 6% × 3/12 = $270
b) $18,000 × 6% × 5/12 = $450 interest revenue. The note is due on June 1, Year 2, so Blake earns 5 months of interest revenue or $450, calculated as follows:
Interest revenue = Principal of $18,000 × Annual interest rate of 6% × 5/12 = $450
Interest in the amount of $720 (or $270 + $450) will be collected in Year 2.
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