Water Mart borrows $120,000 on July 1 with a short-term loan that has an annual
ID: 2426869 • Letter: W
Question
Water Mart borrows $120,000 on July 1 with a short-term loan that has an annual interest rate of 5% which is payable on the first day of each subsequent quarter. What will Water Mart need to accrue on August 31, assuming that no accrual had been made since the last interest payment?
a.
$1,000; Increase liabilities, increase expenses
b. $ 750; Decrease liabilities, decrease cash
c.
$ 750; Increase liabilities, decrease retained earnings
d.
$ 500; Increase expenses
e.$3,000; Decrease liabilities and decrease cash
a.
$1,000; Increase liabilities, increase expenses
b. $ 750; Decrease liabilities, decrease cash
c.
$ 750; Increase liabilities, decrease retained earnings
d.
$ 500; Increase expenses
e.$3,000; Decrease liabilities and decrease cash
Explanation / Answer
A)
.
$1,000; Increase liabilities, increase expenses ( Reason : Walmart needs to pay interest in the first day of the Quarter , so now on August 31 , no payment needs to be paid. However interest is accrued for 2 months i.e 120000*5%*(2/12) = 1000 which is a liability and its also an expenses since it needs to be charged to profit and loss account as an expenses)
.
$1,000; Increase liabilities, increase expenses ( Reason : Walmart needs to pay interest in the first day of the Quarter , so now on August 31 , no payment needs to be paid. However interest is accrued for 2 months i.e 120000*5%*(2/12) = 1000 which is a liability and its also an expenses since it needs to be charged to profit and loss account as an expenses)
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