Exercise 7-2Effects of recognizing accrued interest on financial statements

R.T. Jackson started Jackson Company on January 1, 2014. The company experienced the following events during its first year of operation:

1.Earned $3,000 of cash revenue for performing services.

2.Borrowed $4,800 cash from the bank.

3.Adjusted the accounting records to recognize accrued interest expense on the bank note. The note, issued on August 1, 2014, had a one-year term and a 6 percent annual interest rate.

Required

a.What is the amount of interest expense in 2014?

b.What amount of cash was paid for interest in 2014?

c.Use a horizontal statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. Indicate whether the event increases (I), decreases (D), or does not affect (NA) each element of the financial statements. In the Cash Flows column, designate the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first transaction has been recorded as an example.