Problem 10-26B Effect of an installment note on financial statements

Accounting for Long-Term Debt

Problem 10-26B Effect of an installment note on financial statements

On January 1, Year 1, Kramer Co. borrowed cash from First City Bank by issuing a $90,000 face-value, three-year term note that had a 7 percent annual interest rate. The note is to be repaid by making annual payments of $34,295 that include both interest and principal on December 31. Kramer invested the proceeds from the loan in land that generated lease revenues of $45,000 cash per year.

Required
a. Prepare an amortization schedule for the three-year period.
b. Prepare an income statement, balance sheet, and statement of cash flows for each of the three years. (Hint: Record the transactions for each year in T-accounts before preparing the financial statements.)
c. Does the cash outflow from operating activities remain constant or change each year? Explain.

Problem 10-27B Effect of a line of credit on financial statements

Mott Company has a line of credit with Bay Bank. Mott can borrow up to $400,000 at any time over the course of the Year 1 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during Year 1. Mott agreed to pay interest at an annual rate equal to 1 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Mott pays 6 percent (5 percent + 1 percent) annual interest on $60,000 for the month of January.

Mott earned $25,000 of cash revenue during Year 1.

Required
a. Prepare an income statement, balance sheet, and statement of cash flows for Year 1.
b. Write a memo discussing the advantages to a business of arranging a line of credit.

Problem 10-28B Recording transactions for callable bonds

Dame Co. issued $250,000 of 10-year, 6 percent, callable bonds on January 1, Year 1, with interest payable annually on December 31. The bonds were issued at their face amount. The bonds are callable at 101½. The fiscal year of the corporation is the calendar year.

Required
a. Show the effect of the following events on the financial statements by recording the appropriate amounts in a horizontal statements model like the following one. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA if an element was not affected by the event.

1. Issued the bonds on January 1, Year 1.
2. Paid interest due to bondholders on December 31, Year 1.
3. On January 1, Year 5, Dame Co. called the bonds. Assume that all interim entries were correctly recorded.

b. Prepare journal entries for the three events listed in Requirement a.