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7-1
April
$210,000 x 6% x 1/12
$1,050
May
$380,000 x 7% x 1/12
2,217
June
$250,000 x 7% x 1/12
1,458*
*rounded
b. The amount of cash paid for interest is the same as interest expense. Interest is paid on the
last day of each month.
PROBLEM 7-33
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
120,000
180,000
.06/12
900
March
(50,000)
130,000
.07/12
758*
April
-0-
130,000
.07/12
758
May
-0-
130,000
.07/12
758
June
-0-
130,000
.07/12
758
July
-0-
130,000
.07/12
758
August
-0-
130,000
.07/12
758
September
-0-
130,000
.07/12
758
October
-0-
130,000
.07/12
758
November
(30,000)
100,000
.07/12
583*
December
(50,000)
50,000
.06/12
250
Total
$8,097
*rounded
PROBLEM 7-33
a.
Melvin Company
Effect of Events on the General Ledger
2014
Assets
=
Liabilities
+
Stk. Equity
Event
Cash
=
Note Pay.
+
Ret. Earn.
Acct. Title/RE
Jan.
60,000
60,000
NA
Jan.
(300)
NA
(300)
Interest Expense
Feb.
120,000
120,000
NA
Feb.
(900)
NA
(900)
Interest Expense
Mar.
(50,000)
(50,000)
NA
7-2
Mar.
(758)
NA
(758)
Interest Expense
Apr.
(758)
NA
(758)
Interest Expense
May
(758)
NA
(758)
Interest Expense
June
(758)
NA
(758)
Interest Expense
July
(758)
NA
(758)
Interest Expense
Aug.
(758)
NA
(758)
Interest Expense
Sept.
(758)
NA
(758)
Interest Expense
Oct.
(758)
NA
(758)
Interest Expense
Nov.
(30,000)
(30,000)
NA
Nov.
(583)
NA
(583)
Interest Expense
Dec.
(50,000)
(50,000)
NA
Dec.
(250)
NA
(250)
Interest Expense
Rev.
54,000
NA
54,000
Revenue
Bal.
95,903
50,000
+
45,903
b.
Melvin Company
Income Statement
For the Year Ended December 31, 2014
Service Revenue
$54,000
Expenses
Interest Expense
(8,097)
Net Income
$45,903
PROBLEM 7-33 b. (cont.)
Melvin Company
Financial Statements
Balance Sheet
As of December 31, 2014
Assets
Cash ($50,000 + $45,903)
$95,903
Total Assets
$95,903
Liabilities
Loan Payable
$50,000
Total Liabilities
50,000
Stockholders’ Equity
Common Stock
$ -0-
7-3
Retained Earnings
45,903
Total Stockholders’ Equity
45,903
Total Liabilities and Stockholders’ Equity
$95,903
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Inflow from Revenue
$54,000
Outflow for Interest
(8,097)
Net Cash Flow from Operating Activities
$45,903
Cash Flows From Investing Activities:
-0-
Cash Flows From Financing Activities:
Inflow from Loan
180,000
Outflow to Repay Loan
(130,000)
Net Cash Flow from Financing Activities
50,000
Net Change in Cash
95,903
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$95,903
PROBLEM 7-33 (cont.)
b. When a business has an established line of credit, the business can access funds without
PROBLEM 7-34
Effect of Transactions on Financial Statements
No.
Assets
=
Liab.
+
Equity
Rev./
Gain
−
Exp./
Loss
=
Net Inc.
Cash Flows
a.
+
+
NA
NA
NA
NA
+ FA
b.
−
NA
−
NA
+
−
− OA
c.
+
+
NA
NA
NA
NA
+ FA
d.
−
NA
−
NA
+
−
− OA
e.
−
−
−
NA
+
−
− FA/OA
7-4
PROBLEM 7-35
Brown Co.
Event
No.
Type of
Event
Assets
=
Liabilities
+
Common Stock
+
Retained
Earnings
Net Income
Cash Flow
1.
AS
+
NA
+
NA
NA
+ FA
2.
AS
+
+
NA
NA
NA
+ FA
3.
AE
+−
NA
NA
NA
NA
− IA
4.
AS
+
NA
NA
+
+
+ OA
5.
AU/CE
−
+
NA
−
−
− OA
6.
AS
+
NA
NA
+
+
+ OA
7.
AU/CE
−
+
NA
−
−
− OA
8.
AS/AE
+
NA
NA
+
+
+ IA
9.
AU
−
−
NA
NA
NA
− FA
7-5
PROBLEM 7-36
a. The market rate of interest was greater than the stated rate of interest. Consequently, the
b.
2014
2015
Liabilities
Interest Payable
$ 4,000
$ 4,000
Bonds Payable
200,000
200,000
Less: Discount on Bonds Payable
(5,375)
1
(4,625)
2
Carrying Value of Bonds Payable
194,625
195,375
Total Liabilities
$194,625
$195,375
1$6,000 − $625 = $5,375
2$5,375 − $750 = $4,625
c.
2014
2015
Interest Expense Reported on Income Statement
$10,625
$12,750
d.
2014
2015
Interest Paid in Cash to Bondholders
$6,000
$12,000
7-6
PROBLEM 7-37
Vernon Company
Income Statement
For the Year Ended December 31, 2014
Sales Revenue
$900,000
Cost of Goods Sold
(575,000)
Gross Margin
325,000
Operating Expenses
Salaries Expense
$102,000
Operating Expenses
45,000
Warranty Expense
7,200
Uncollectible Accounts Expense
25,000
Total Operating Expenses
(179,200)
Operating Income
145,800
Non-Operating Items
Interest Revenue
4,200
Interest Expense
(16,000)
Gain on Sale of Equipment
7,000
Total Non-Operating Items
(4,800)
Net Income
$141,000
7-7
PROBLEM 7-37 (cont.)
Vernon Company
Balance Sheet
As of December 31, 2014
Assets
Current Assets
Cash
$ 46,000
Accounts Receivable
$88,000
Less: Allow. for Doubtful Accounts
(14,000)
74,000
Inventory
126,000
Interest Receivable
1,600
Prepaid Rent
18,000
Supplies
4,500
Notes Receivable
12,500
Total Current Assets
$282,600
Property, Plant and Equipment
Buildings and Equipment
206,000
Less: Accumulated Depreciation
(46,000)
160,000
Land
75,000
Total Property, Plant and Equipment
235,000
Total Assets
$517,600
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable
$ 35,000
Unearned Revenue
27,000
Warranties Payable
4,500
Interest Payable
6,000
Salaries Payable
48,000
Total Current Liabilities
$120,500
Long-Term Liabilities
Notes Payable
140,000
Total Long-Term Liabilities
140,000
Total Liabilities
260,500
Stockholders’ Equity
Common Stock
90,000
Retained Earnings*
167,100
Total Stockholders’ Equity
257,100
7-8
PROBLEM 7-38
a.
Date
Cash
Payment
Interest
Expense
Premium
Amortization
Carrying
Value
January 1, 2014
124,920
December 31, 2014
9,600
8,744*
856
124,064
December 31, 2015
9,600
8,684
916
123,148
December 31, 2016
9,600
8,620
980
122,168
December 31, 2017
9,600
8,552
1,048
121,120
December 31, 2018
9,600
8,480*
1,120*
120,000
Totals
48,000
43,080
4,920
*rounded to whole dollar
b. The balance sheet would show the carrying value of the bond liability. The carrying value
could be shown net of the premium, $123,148, with further disclosure in the notes to the
financial statements. Alternatively, the face value plus the premium could be shown as
follows:
Bond liability
$120,000
Plus: Bond premium
3,148*
Carrying value
$123,148
c. The income statement would show $8,620 of interest expense.
SOLUTIONS TO ANALYZE, THINK, COMMUNICATE
ATC 7-1
All dollar amounts are in millions.
b. According to Note 17, bank overdrafts are included in Accounts Payable, and Target had
7-9
$588 as of February 2, 2013.
c. According to Note 19, Target’s average interest rate was 4.7% on long term debt and
0.16% on commercial paper, which is short term debt.
ATC 7-2
a.
(1)(a) Cash Proceeds
Lot, Inc.: $100,000 x 102.25% = $102,250
(1)(b)
Interest Paid:
Lot, Inc.: Interest paid = $100,000 x 8% = $8,000 per year.
(1)(c)
Interest Expense = Interest paid +/− amortized discount/premium.
Amortization of premium or discount:
Lot, Inc.: Premium amortization = $2,250 5 = $450 per year.
Interest Expense:
Lot, Inc.: $8,000 − $450 = $7,550 per year.
(2)
December 31, 2014
Lot
Max
Par
Liabilities
Bonds Payable
$100,000
$100,000
$100,000
Less: Discount on Bonds Payable
(1,600)**
Plus: Premium on Bonds Payable
1,800*
3,200***
Carrying Value of Bonds Payable
$101,800
$ 98,400
$103,200
*Lot, Inc. $2,250 − $450 = $1,800 ***Par, Inc. $4,000 − $800 = $3,200
7-10
**Max, Inc. $2,000 − $400 = $1,60ATC 7-2 (cont.)
c. The amount of interest expense is different for each of the three companies because the issue
d. The amount of interest paid is the same for each of the companies because the face value of
the bond and the interest rate is the same for all three.
ATC 7-3
Theses answers are based on Dominion Resources December 30, 2012 and Lowe’s February 1,
2013 Form 10-Ks. All dollar amounts are in millions.
a. Lowe’s financed 57.6% of its assets with liabilities as of February 1, 2013.
b. A company in the business of generating and supplying electric and gas power is less
likely to be adversely affected by a weak economy. People use electricity even if they are
c. According to Note 6 – Short-term Borrowings and Lines of Credit, Lowe’s has several
ACT 7-4
b. The amount of debt seems excessive in view of the fact that the amount of interest on the
c. Since YUM will have a net loss after interest, it will not pay any income taxes.
7-11
d. An explanation of how YUM could meet its debt payments would be that there is
sufficient cash flow to pay debt. With a large amount of depreciation (a noncash
ATC 7-5
a. David’s scheme made Global’s financial statements appear much better than what they
actually were. If the liabilities are not reported in the balance sheet, it will result in
b. David’s most glaring violation of the Code of Professional Conduct is that of Article II,
The Public Interest. His scheme served to mislead the general public and all unaware
c. The three elements of the fraud triangle are opportunity, pressure and rationalization.
Since David’s scheme required the cooperation of another party and the collusion of
upper management, the opportunity to commit fraud was less. However, upper
