Question

Use the following to answer questions 6-10 November 1 FLY Tech, an Airline maintenance company, borrows $1,000,000 cash from Bank of America to expand operations. FLY signs a 1 year, 3% promissory note. FLY's year-end is December 31. 6 How was the loan classified on the company's December 31, vear 1 balance sheet? A Current liability B. Long term liability C Note disclosure only D. Stockholders' Equity 7. How was the loan classified on the company's December 31, year 1 statement of cash flow? A. Operating activity B. Investing activity C Financing activity D. Not shown on the statement of cash flows /12 10000oo0,03 X 2 8. SS000 How much interest should be accrued on December 31 of the first year (assume no previous entry was recorded for interest on the loan)? 1 000 000 0.03 * 10/12 2. $11025020 When the note is paid at maturity (October 31, year 2) how much cash is paid to Bank of America? $25 000. When the note is paid at maturity in the second accounting year, how much does net income decrease?

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and format. For detailed answer refer to the supporting sheet.

A Answer Part 6) The correct answer is A) Current Liability Explanation Current liability refer to the liability which is to be paid with in 12 months, since it has to be paid on October 31, so it means with in 12 months from the end of financial year. Part 7) The correct answer is C) Financing activities Explanation Financing activities means refer to the activities in which are is received from the loans and notes payable. So it will be classified as financing activities. Part 8) The correct answer is $ 5000 Interest accrued = amount*3% *2/12 Interest accrued = 1000000*3%*2/12 = $ 5000 ш

21 Part 9) 22 The correct answer is $ 1030000 23 24 Cash Paid = loan amount + interest = 1000000 + (1000000*3% ) =$ 1030000 25 26 27 28 Part 10) 29 The correct answer is $ 25000 30 31 Net income decrease by = interest expense 32 = 1000000*3% *10/112 33 =$ 25000 34 35