Question

Required information [The following information applies to the questions displayed below.) Mott Company has a line of credit with Bay Bank. Mott can borrow up to $530,000 at any time over the course of the 2018 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2018. 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 8 percent (7 percent + 1 percent) annual interest on $72,000 for the month of January. Prime Rate for the Month, % Month January February March April through October November December Amount Borrowed or (Repaid) $ 72,000 54,000 (48,000) No change (34,000) (23,000) No change Mott earned $38,000 of cash revenue during 2018. b. Prepare an income statement, balance sheet, and statement of cash flows for 2018.

Answer 1

Computation of Interest Borrowed Month Opening (Repaid) Closing January February March April May June July August September October November December $ 72,000 $ 72,000 $ 72,000 $ 54,000 $ 1,26,000 $ 1,26,000 $ -48,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ 78,000 $ -34,000 $ 44,000 $ 44,000 $ -23,000 $ 21,000 Interest % Interest (prime for the rate +1) month 8% $ 480 8% $ 840 9% $ 585 9% $ 585 9% $ 585 9% $ 585 9% $ 585 9% $ 585 9% $ 585 9% $ 585 9% $ 330 8% $ 140 $ 6,470 MOTT COMPANY Income Statement for the year ended December 31, 2018 Revenue (Cash) Expenses: Interest on Borrowing Net Income $ 38,000 $ 6,470 $ 31,530

MOTT COMPANY Balance Sheet as of December 31,2018 Assets Bank ($21000 + $31530) $ 52,530 Total Assets $ 52,530 Liabilities Loan from Bank Total Liabilties $ 21,000 $ 21,000 Stockholder's Equity Reserve and Surplus Total Stockholders' equity $ 31,530 $ 31,530 Total liabilties and stockholders' equity $ 52,530 MOTT COMPANY Statement of Cash flows for the year ended December 31,2018 Cash flows from operating activities: Net Profit before tax $ 31,530 Add: Interest on Borrowings $ 6,470 Nest cashflow from Operating activities $ 38,000 0 Cash flows from Investing Activities $ 21,000 $ -6,470 Cash flow from financing activities: Proceeds from Bank loan Interest paid on Borrowings Nest cashflow from Financing activities Net change in Cash Beginning Cash Balance Ending Cash Balance $ 14,530 $ 52,530 $ 52,530

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