Indicate how each event affects the elements of the financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. Increase = IDecrease = DNo Effect = NA(Note that "No Effect" means that the event either does not affect the element of the financial statements or that the event causes an increase in that element and is offset by a decrease in that same element.) On December 31, Year 2, Bates Co. paid $60,000 to Municipal Bank to pay off the face value of a discount note that Bates had issued one year earlier. Show the effects of the payment and recognition of 2016 interest on the note.AssetsLiabilitiesStk. EquityRevenuesExpensesNetStmt. of ?IncomeCash Flows???????

Question

What will be an ideal response?

Answer 1

(D) (D) (D) (NA) (I) (D) (D)
When the note is repaid, Bates must first recognize interest expense for Year 2 by amortizing the remaining balance in the discount on notes payable account. This portion of the transaction increases liabilities (by decreasing discount on notes payable, a contra liability account) and decreases stockholders' equity (retained earnings). It increases expenses (interest expense), which decreases net income The payment of the note's face value decreases assets (cash) and decreases liabilities (notes payable). The net effect on liabilities is a decrease. The payment is reported as a cash outflow for financing activities for the principal and as a cash outflow for operating activities for the interest.