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QUESTION 43

1. On January 1, 2020, Smith Company signed a ten-year Note for the acquisition of equipment. Annual note payments of $22,000, based on an interest rate of 10% are to be made every December 31, beginning with December 2020. The present value of the note payments is $135,180.

   Required:

   Indicate the effect of the following on the companys accounting equation. Indicate each account title affected and the dollar change and whether it increased or decreased.

   To record the acquisition of equipment on January 1, 2020.

   		Increased the asset leased equipment and liability lease liability for $220,000.
   		Increased the asset equipment and liability note payable for $135,180.
   		Increased the asset cash and liability note payable for $135,180.
   		Increased the asset cash and liability note payable for $220,000.

QUESTION 42

1. ABC, Inc. issued $5,000,000 face value, 20-year, 12% bonds on March 1, 2020 when the market rate of interest was 12%. Interest payments are due every February 28 and August 31. The company follows a calendar year.

   Required:

   Indicate the best answer for the effect of the following on the companys accounting equation. Identify each account title affected and dollar change, and whether it increased or decreased.

   The payment of interest on February 28, 2021.

   		Increase interest payable and interest expense, thereby decreasing net income, retained earnings, and cash for 200,000.
   		Increase interest expense $400,000, thereby decreasing net income and retained earnings for 400,000. Decrease cash $600,000 and interest payable $200,000.
   		Increase interest expense $100,000, thereby decreasing net income and retained earnings for 100,000. Decrease cash $300,000 and interest payable $200,000.
   		Increase interest expense $100,000, thereby decreasing net income and retained earnings for 100,000. Decrease cash $300,000 and increased interest payable $200,000.

QUESTION 41

1. ABC, Inc. issued $5,000,000 face value, 20-year, 12% bonds on March 1, 2020 when the market rate of interest was 12%. Interest payments are due every February 28 and August 31. The company follows a calendar year.

   Required:

   Indicate the best answer for the effect of the following on the companys accounting equation. Identify each account title affected and dollar change, and whether it increased or decreased.

   The accrual of interest expense at December 31, 2020.

   		Increase interest payable and interest expense, thereby decreasing net income and retained earnings for 200,000.
   		Increase interest expense, thereby decreasing net income, retained earnings, and cash for 300,000.
   		Increase interest payable and interest expense, thereby decreasing net income and retained earnings for 300,000.
   		Increase interest expense, thereby decreasing net income, retained earnings, and cash for 200,000.

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