Problem 9-27B Accounting for a discount note—two accounting cycles
Ball Company was started in Year 1. The following summarizes transactions that occurred during Year 1:
- Issued a $40,000 face value discount note to Golden Savings Bank on April 1, Year 1. The note had a 6 percent discount rate and a one-year term to maturity.
- Recognized revenue from services performed for cash, $130,000.
- Incurred and paid $98,000 cash for selling and administrative expenses.
- Amortized the discount on the note at the end of the year, December 31, Year 1.
- Prepared the necessary closing entries at December 31, Year 1.
The following summarizes transactions that occurred in Year 2:
- Recognized $215,000 of service revenue in cash.
- Incurred and paid $151,000 for selling and administrative expenses.
- Amortized the remainder of the discount for Year 2 and paid the face value of the note.
- Prepared the necessary closing entries at December 31, Year 2.
Required
a. Show the effects of each of the transactions on the elements of the financial statements, using a horizontal statements model like the one shown next. Use + for increase, − for decrease, and NA for not affected. The first transaction is entered as an example. (Hint: Closing entries do not affect the statements model.)
b. Prepare entries in general journal form for the transactions for Year 1 and Year 2, and post them to T-accounts.
c. Prepare an income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Year 1 and Year 2.
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