The following information was drawn from the 2007 annual reports of three real-world companies. The 2006 balance sheet of Balder Electric Company reported $0.6 million of accrued interest expense. In 2007 it reported $27.7 million of accrued interest expense. The 2006 balance sheet of The McGraw-Hill Companies, Inc., reported senior long-term notes payable of $0.3 million. In 2007 it reported $1.2 billion of these notes payables. The 2006 balance sheet of Terra Nitrogen, L. P., reported customer prepayments of $35.3 million. In 2007 it reported $154.6 million of customer prepayments.
Required
For each situation presented above, write a brief explanation of how the company’s 2007 financial statements would have been affected by the item in question, and whether the item is an accrual, deferral, or neither. Be sure to discuss primary and secondary effects. For example, if a company had an increase in its salaries expense, the primary effects would be the increase in expenses and decrease in net income. The secondary effects would include a decrease in retained earnings and a decrease in cash or an increase in salaries payable. Be as specific as possible.