7-1
(3)
Cash Flows From Financing Activities:
Inflow from Issue of Note
$50,000
Outflow to Repay Note
(8,959)
Net Cash Flow from Financing Activities
$41,041
d. Principal 1/1/15: $41,041 (see schedule in book)
Interest Expense: $41,041 x 5% = $2,052.05 or $2,052 rounded to nearest
dollar.EXERCISE 7-12
Sims Co.
Effect of Transactions on Financial Statements
Balance Sheet
Statement of
Date
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flows
1/1
+
+
NA
NA
NA
NA
+ FA
1/31
−
NA
−
NA
+
−
− OA
2/1
+
+
NA
NA
NA
NA
+ FA
2/28
−
NA
−
NA
+
−
− OA
3/1
−
−
NA
NA
NA
NA
− FA
3/31
−
NA
−
NA
+
−
− OA
4/30
−
NA
−
NA
+
−
− OA
5/31
−
NA
−
NA
+
−
− OA
6/30
−
NA
−
NA
+
−
− OA
7/31
−
NA
−
NA
+
−
− OA
8/31
−
NA
−
NA
+
−
− OA
9/30
−
NA
−
NA
+
−
− OA
10/31
−
NA
−
NA
+
−
− OA
11/1
−
−
NA
NA
NA
NA
− FA
11/30
−
NA
−
NA
+
−
− OA
12/1
−
−
NA
NA
NA
NA
− FA
12/31
−
NA
−
NA
+
−
− OA
Computation of Interest Expense
Month
Amount
Borrowed (Repaid)
End of Month
Balance
x
Interest Rate per
Month
=
Interest
Expense
January
$60,000
$ 60,000
.06/12
$ 300
February
40,000
100,000
.06/12
500
March
(30,000)
70,000
.07/12
408
7-2
April
-0-
70,000
.07/12
408
May
-0-
70,000
.07/12
408
June
-0-
70,000
.07/12
408
July
-0-
70,000
.07/12
408
August
-0-
70,000
.07/12
408
September
-0-
70,000
.07/12
408
October
-0-
70,000
.07/12
408
November
(20,000)
50,000
.07/12
292
December
(10,000)
40,000
.06/12
200
Total
$4,556
EXERCISE 7-13
a.
Chapman Co.
Effect of Events on the General Ledger
2014 and 2015
Assets
=
Liabilities
+
Stkholders’
Equity
Event
Cash
+
Land
=
Bonds
Pay.
+
Retained
Earnings
Acct. Title/RE
2014
1/1
400,000
NA
400,000
NA
1/1
(400,000)
400,000
NA
NA
12/31
60,000
NA
NA
60,000
Lease Rev.
12/311
(24,000)
NA
NA
(24,000)
Int. Exp.
Bal.
36,000
400,000
400,000
36,000
2015
Bal.
36,000
400,000
400,000
36,000
12/31
60,000
NA
NA
60,000
Lease Rev.
12/31
(24,000)
NA
NA
(24,000)
Int. Exp.
Bal.
72,000
+
400,000
400,000
+
72,000
1$400,000 x 6% = $24,000
EXERCISE 7-13 (cont.) b.
Chapman Company Financial Statements
For the Year Ended December 31
Income Statements
2014
2015
Lease Revenue
$60,000
$60,000
Interest Expense
(24,000)
(24,000)
7-3
Net Income
$36,000
$36,000
Balance Sheets
Assets
Cash
$ 36,000
$ 72,000
Land
400,000
400,000
Total Assets
$436,000
$472,000
Liabilities
Bonds Payable
$400,000
$400,000
Stockholders’ Equity
Common Stock
-0-
-0-
Retained Earnings
36,000
72,000
Total Stockholders’ Equity
36,000
72,000
Total Liab. and Stockholders’ Equity
$436,000
$472,000
Statements of Cash Flows
Cash Flows From Operating Activities:
Inflow from Revenue
$ 60,000
$ 60,000
Outflow for Interest
(24,000)
(24,000)
Net Cash Flow from Operating Act.
36,000
36,000
Cash Flows From Investing Activities:
Outflow to Purchase Land
(400,000)
-0-
Cash Flows From Financing Activities:
Inflow from Bond Issue
400,000
-0-
Net Change in Cash
36,000
36,000
Plus: Beginning Cash Balance
-0-
36,000
Ending Cash Balance
$ 36,000
$ 72,000
EXERCISE 7-14
a. $150,000 x 6% = $9,000
7-4
c. The total amount of interest paid each year will be the same regardless of whether it is paid
EXERCISE 7-15
a. Discount
a.
Effect of Transactions on Financial Statements
Balance Sheet
Income Statement
Statement of
No.
Assets
=
Liab.
+
S. Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flows
1.
+
+
NA
NA
NA
NA
+ FA
2a.*
NA
+
−
NA
+
−
NA
2b.*
−
NA
−
NA
+
−
− OA
*2a is amortization of discount; 2b is payment of interest.
b. Interest Expense, 2014:
c. Carrying Value, December 31, 2014:
Bonds Payable $300,000
7-5
d. Interest Expense, 2015:
Stated Interest ($300,000 x 6%) $18,000
e. Carrying Value, December 31, 2015:
Bonds Payable $300,000
***$6,000 − $1,200 = $4,800EXERCISE 7-17
Face x Selling Price
Cash Proceeds
Discount or Premium
a.
$400,000 x 101%
$404,000
Premium
b.
$250,000 x 98%
245,000
Discount
c.
$300,000 x 102.25%
306,750
Premium
d.
$200,000 x 97.5%
195,000
Discount
EXERCISE 7-18
a. $120,000 x 1% = $1,200; Premium
EXERCISE 7-19
a. Premium (Stated rate is greater than market rate.)
7-6
EXERCISE 7-20
a.
Effect of Transactions on Financial Statements
Balance Sheet
Income Statement
Stmt. of
No.
Assets
=
Liab.
+
S. Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flows
1.
+
+
NA
NA
NA
NA
+ FA
2a.
NA
−
+
NA
−
+
NA
2b.
−
NA
−
NA
+
−
− OA
b. Bond Premium: $300,000 x 1.5% = $4,500
Amortization of bond premium: $4,500 10 = $450 per year
c. Interest Expense, 2014:
d. Carrying Value, December 31, 2015:
Bonds Payable $300,000
e. Interest Expense, 2015:
Stated Interest ($300,000 x 6%) $18,000
7-7
EXERCISE 7-21 a.
Midsouth Equipment Sales Corp. Statements Model
Assets
=
Liabilities
+
Equity
No.
Cash
Inv.
=
Accts. Pay.
Sales Tax
Pay.
Warr.
Pay.
Int. Pay
Notes Pay.
+
Comm.
Stock
Ret. Earn.
1.
60,000
NA
NA
NA
NA
NA
NA
60,000
NA
2.
NA
160,000
160,000
NA
NA
NA
NA
NA
NA
3a.
237,600
NA
NA
17,600
NA
NA
NA
NA
220,000
3b.
NA
(140,000)
NA
NA
NA
NA
NA
NA
(140,000)
4.
NA
NA
NA
NA
8,800
NA
NA
NA
(8,800)
5.
(14,400)
NA
NA
(14,400)
NA
NA
NA
NA
NA
6.
40,000
NA
NA
NA
NA
NA
40,000
NA
NA
7.
(6,600)
NA
NA
NA
(6,600)
NA
NA
NA
NA
8.
(61,000)
NA
NA
NA
NA
NA
NA
NA
(61,000)
9.
(145,000)
NA
(145,000)
NA
NA
NA
NA
NA
NA
10.1
NA
NA
NA
NA
NA
800
NA
NA
(800)
Bal.
110,600
20,000
=
15,000
3,200
2,200
800
40,000
+
60,000
9,400
1$40,000 x 6% x 4/12 = $800.
Income Statement
Statement of
Event
Rev.
–
Exp.
=
Net Inc.
Cash Flows
1.
NA
NA
NA
60,000 FA
2.
NA
NA
NA
NA
3a.
220,000
NA
220,000
237,600 OA
3b.
NA
140,000
(140,000)
NA
4.
NA
8,800
(8,800)
NA
5.
NA
NA
NA
(14,400) OA
6.
NA
NA
NA
40,000 FA
7.
NA
NA
NA
(6,600) OA
8.
NA
61,000
(61,000)
(61,000) OA
9.
NA
NA
NA
(145,000) OA
10
NA
800
(800)
NA
7-8
EXERCISE 7-21 (cont.)
b.
Midsouth Equipment Sales Corp.
Income Statement
For the Year Ended December 31, 2014
Sales Revenue
$220,000
Cost of Goods Sold
(140,000)
Gross Margin
80,000
Expenses
Operating Expenses
$61,000
Warranty Expense
8,800
Total Operating Expenses
(69,800)
Operating Income
10,200
Interest Expense
(800)
Net Income
$ 9,400
EXERCISE 7-21 b. (cont.)
Midsouth Equipment Sales Corp.
Balance Sheet
As of December 31, 2014
Assets
Cash
$110,600
Merchandise Inventory
20,000
Total Assets
$130,600
Liabilities
Accounts Payable
$ 15,000
Sales Tax Payable
3,200
Warranties Payable
2,200
Interest Payable
800
Notes Payable
40,000
Total Liabilities
61,200
7-9
Stockholders’ Equity
Common Stock
$60,000
Retained Earnings
9,400
Total Stockholders’ Equity
69,400
Total Liabilities and Stockholders’ Equity
$130,600
EXERCISE 7-21 c. (cont.)
Midsouth Equipment Sales Corp.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Inflow from Customers
$220,000
Inflow from Sales Tax
17,600
Outflow for Inventory
(145,000)
Outflow for Expenses1
(67,600)
Outflow for Sales Tax
(14,400)
Net Cash Flow from Operating Activities
$10,600
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Stock Issue
60,000
Inflow from Loan
40,000
Net Cash Flow from Financing Activities
100,000
Net Change in Cash
110,600
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$110,600
1. $61,000 + $6,600 = $67,600
c. Current Liabilities:
Accounts Payable $15,000
7-10
EXERCISE 7-22
Blackmon Co.
Classified Balance Sheet
As of December 31, 2014
Assets
Current Assets
Cash
$29,650
Accounts Receivable
36,200
Merchandise Inventory
38,300
Prepaid Insurance
3,600
Total Current Assets
$ 107,750
Property, Plant and Equipment
Office Equipment
36,400
Total Property, Plant and Equipment
36,400
Total Assets
$ 144,150
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable
$ 12,400
Long-Term Liabilities
Long-Term Notes Payable
45,500
Total Liabilities
57,900
Stockholders’ Equity
Common Stock
$50,000
Retained Earnings
36,250
Total Stockholders’ Equity
86,250
Total Liabilities and Stockholders’ Equity
$144,150
Face Value
−
Bond Price
=
Discount
7-11
$250,000
−
$219,277
=
$30,723
b.
Carrying Value
x
Effective Rate
=
Interest Expense
$219,277
x
.10
=
$21,928
c. Compute the Ending Balance in the Discount Account
Face Value
x
Stated Rate
=
Cash Payment
$250,000
x
.08
=
$20,000
Interest Expense
−
Cash Payment
=
Amortization