Outcome on the accounting equation on payment of interest

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Reference no: EM1312595

Outcome on the accounting equation on payment of interest on the loan payable in due and in advance.

On July 1, 2007, Leach Company needs exactly $103,200 in cash to pay an existing obligation. Leach has decided to borrow from State Bank, which charges 14% interest on loans. The loan will be due in one year. Leach is unsure, however, whether to ask the bank for a) an interest-baring loan with interest and principle payable at the end of the year or b) a loan due in one year but with interest deducted in advance.
Assume that Leach negotiates and signs the one-year note with the bank on July 1, 2007. Also assume that Leach\'s accounting year ends December 31. Determine the effect on the accounting equation of the issuance of the note and the interest on the note, assuming that

a. Interest is paid when the loan is due

b. Interest is deducted in advance

Reference no: EM1312595

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