On September 1, Year 1 Western Company loaned $36,000 cash to Eastern Company. The one-year note carried a 5% rate of interest. The amount of interest revenue on the income statement and the amount of cash flow from operating activities shown on Western's December 31, Year 1 financial statements would be

A.$600 interest revenue and $1,800 cash flow from operating activities.

B.$1,200 interest revenue and $1,800 cash flow from operating activities.

C.$600 interest revenue and zero cash flow from operating activities.

D.$1,200 interest revenue and zero cash flow from operating activities.

Question

Ashley Lawson

Business

22 November, 19:39

On September 1, Year 1 Western Company loaned $36,000 cash to Eastern Company. The one-year note carried a 5% rate of interest. The amount of interest revenue on the income statement and the amount of cash flow from operating activities shown on Western's December 31, Year 1 financial statements would be

A.$600 interest revenue and $1,800 cash flow from operating activities.

B.$1,200 interest revenue and $1,800 cash flow from operating activities.

C.$600 interest revenue and zero cash flow from operating activities.

D.$1,200 interest revenue and zero cash flow from operating activities.

+4

Answers (1)

Know the Answer?

Bianca Ferrell · Answer 1

Option (C) is correct.

Explanation:

Given that,

Cash amount loaned = $36,000

Rate of interest on note = 5%

Time period: From September 1, Year 1 to December 31, Year 1 = 4 months

Amount of Interest revenue:

= Cash amount loaned * Interest rate * Time period

= $36,000 * 0.05 * (4/12)

= $36,000 * 0.05 * (1/3)

= $599.9 or $600

There is no cash flow from operating activity in respect of loan given to another company and interest revenue accrued on loan amount.