Question

On January 1, Year 1, Brown Co. borrowed cash from First Bank by issuing a $102,000 face-value, four-year term note that had an 7 percent annual interest rate. The note is to be repaid by making annual cash payments of $30,113 that include both interest and principal on December 31 of each year. Brown used the proceeds from the loan to purchase land that generated rental revenues of $54,000 cash per year.

a. Prepare an amortization schedule for the four-year period. (Round your answers to the nearest dollar amount.)

b. Prepare an income statement, balance sheet, and statement of cash flows for each of the four years. (Hint: Record the transactions for each year in T-accounts before preparing the financial statements.) (Round your answers to the nearest dollar amount. Statement of Cash Flows only: Items to be deducted must be indicated with a minus sign.)

Answer 1

ANSWER

Consider Year 1 is 2016

1. Prepare amortization schedule in excel using the below formula: N Company B Amortization Schedule Year Principal balance on January 1 Cash payment on December 31 Applied to interest 102000 3 0113 30113 5 2016 6 2017 7 2018 8 2019 Applied to principal =CS-D5 -C6-D6 -C7-D7 =88 =B57% -86*7% -B77% =B8*7% Principal balance at end of the period J=BS-ES 86-E6 -B7-E7 188-E8 EFS F6 F7 130113 0113 3 Company B Amortization Schedule Applied Principal balance on January 1 Year Cash payment on December 31 Principal balance at end of the Applied to principal to interest period 2016 2017 | 2018 2019 $102,000 $79,027 $54,446 $28,144 $30,113 $30,113 $30,113 $30,113 $7,140 $5,532 $3,811 $1,970 $22,973 $24,581 $26,302 $28,144 $79,027 $54,446 $28,144 $0

Prepare journal entries: Credit Debit $102,000 Date Acccount title and explanation 1-Jan-16 Cash (A+) Notes payable (L+) I(To record the issuance of note) $102,000 Credit Debit $102,000 Date Acccount title and explanation 1-Jan-16 Land (A+) Cash (A-) (To record the purchase of land) $102,000 Credit Date Acccount title and explanation 31/12/2016 Interest expense (SE-) Note payable (L-) Cash (A) (To record the purchase of land) Debit $7,140 $22,973 $30,113 Credit Debit $54,000 Date Acccount title and explanation 31/12/2016 Cash (A+) Rental revenue (SE) (To record the earnings of rental revenue) $54,000

Credit Date Account title and explanation 31/12/2017 Interest expense (SE) Note payable (L- Cash (A-) (To record the purchase of land) Debit $5,5321 $24,581 $30,113 Debit Credit Date Acccount title and explanation 31/12/2017 Cash (A+) Rental revenue (SE+) (To record the earnings of rental revenue) $54,000 Credit Date Acccount title and explanation 31/12/2018 Interest expense (SE) Note payable (L-) Cash (A-) (To record the purchase of land) Debit $3,811 $26,302 $30,113 Credit Debit $54,000 Date Acccount title and explanation 31/12/2018 Cash (A+) Rental revenue (SE+) (To record the earnings of rental revenue) $54,000

Credit Date Acccount title and explanation 31/12/2019 Interest expense (SE) Note payable (L-) Cash (A-) (To record the purchase of land) Debit $1,970 $28,144 $30,1141 Credit Debit $54,000 Date Acccount title and explanation 31/12/2019 Cash (A+) Rental revenue (SE+) (To record the earnings of rental revenue) $54,000

Prepare ledger account: Date Particulars 1-Jan-16 Note payable 31/12/2016 Revenue Credit $102,000 Cash Account Debit Date 1 Particulars $102,000 1-Jan-16 Land $54,000 31/12/2016 Interest expense 31/12/2016 Note payable 31/12/2016 Ending balance $156,000 Total $22,973 $23,887 $156,000 Total 1-Jan-17 Beginning balance | 31/12/2017 Revenue $23,887 $54,000 31/12/2017 Interest expense 31/12/2017 Note payable 31/12/2017 Ending balance Total $5,532 $24,581 $47 774 $77,887 Total $77,887 1-Jan-18 Beginning balance 31/12/2018 Revenue $47,774 $54,000 31/12/2018 Interest expense 31/12/2018 Note payable 31/12/2018 Ending balance $3,811 $26,302 $71,661 $101,774 Total $101,774 Total 1-Jan-19 Beginning balance 31/12/2019 Revenue $71,661 $54,000 31/12/2019 Interest expense 31/12/2019 Note payable 31/12/2019 Ending balance Total $1,970 $28,144 $95,547 $125,661 Total 1 $125,661

Date Particulars 1-Jan-16 Cash Total 1-Jan-17 Beginning balance Total 1-Jan-18 Beginning balance Total 1-Jan-18 Beginning balance Total Land Account Debit Date Particulars $102,000 31/12/2016 Ending balance $102,000 Total $102,000 31/12/2017 Ending balance $102,000 Total $102,000 31/12/2018 Ending balance $102,000 Total $102,000 31/12/2018 Ending balance $102,000 Credit $102,000 $102,000 $102,000 $102,000 $102,000 $102,000 $102,000 $102,000 Total Credit $102,000 Date Particulars 31/12/2016 Cash 31/12/2016 Ending balance Total 31/12/2017 Cash 31/12/2017 Ending balance $102,000 $79,027 Note payable Account Debit Date Particulars $22,973 1-Jan-16 Cash $79,027 $102,000 Total $24,581 1-Jan-17 Beginning balance $54,446 $79,027 Total $26,302 1 -Jan-17 Beginning balance $28,144 $54,446 Total $28,144 | 1-Jan-17 Beginning balance $0 $28,144 Total Total $79,027 $54,446 31/12/2017 Cash 31/12/2017 Ending balance Total 31/12/2017 Cash 31/12/2017 Ending balance Total $54,446 $28,144 $28,144

Prepare income statement: Company B Income statement For the year ended December 31 2016 2017 $54,000 $54,000 T $7,140 $5,532 $46,860 $48,468 Add: Rental revenue Less: Interest expense Net income 2018 $54,000 $3,811 $50,189 2019 $54,000 $1,970 $52,030

Prepare statement of retained earnings Company B Statement of retained earnings For the year ended December 31 2016 2017 2018 $46,860 $95,328 $54,000 $54,000 $54,000 $7,140 $5,532 $3,811 $46,860 $95,328 $145,517 Beginning retained earnings Add: Rental revenue Less: Interest expense Ending retained earnings 2019 $145,517 $54,000 $1,970 $197,547

Prepare balance sheet statement: Assets Cash Land Total assets Company B Balance sheet statement For the year ended December 31 2016 2017 $23,887) $47,774 $102,000 $102,000 | $125,887 $149,774 2018 $71,661 $102,000 $173,661 2019 $95,547 $102,000 $197.547 $79,027 $54,446 $28,144 $0 Liabilities Notes payable Stockholders' equity Retained earnings $46,860 $95,328 $145,517 $197,547 Total liabilities and stockholders' equity (Liabilities+stockholders' equity) $125,887 $149,774 $173,661 $197.547

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