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7 – 26 Accounting for short term debt and sales tax — two accounting cycles.
The following transactions apply to Artesia Co. for 2012, its first year of operations.
1 Received $40,000 cash from the issue of a short term note with a 5 percent interest rate and a one year maturity. The note was issued on April 1, 2012.
2 Received $120,000 cash plus applicable sales tax from performing services. The services are subject to a sales tax rate of 6 percent.
3 Paid $72,000 cash for other operating expenses during the year.
4 Paid the sales tax due on $100,000 of the service revenue for the year. Sales tax on the balance of the revenue is not due until 2013.
5 Recognized the accrued interest at December 31, 2012
The following transactions apply to Artesia Co. for 2013.
1 Paid the balance of the sales tax due for 2012.
2 Received $145,000 cash plus applicable sales tax from performing services. The services are
subject to a sales tax rate of 6 percent.
3 Repaid the principal of the note and applicable interest on April 1, 2013.
4 Paid $85,000 of other operating expense s during the year.
5 Paid the sales tax due on $120,000 of the service revenue. The sales tax on the balance of the revenue is not due until 2014.
Required
a. Organize the transaction data in accounts under an accounting equation.
b. Prepare an income statement, a statement of changes in stockholders’ equity, a balance
Sheet and a statement of cash flow for 2012 and 2013.
7 – 27 Effect of accrued interest on financial statements.
Norman Co. borrowed $15,000 from the local bank on April 1, 2012, when the company was started. The note had an 8 % annual interest rate and a one year term to maturity. Norman Co. recognized $42, 000of revenue on account in 2012 and $56, 000 of revenue on account in 2013. Cash collection from accounts receivable were $38,000 in 2012 and $58,000 in 2013. Norman Co paid $26,000 of salaries expense in 2012 and $32,000 of salaries expense in 2013. Norman Co. paid the loan and interest at the maturity date.
Required
a. Organize the information in accounts under an accounting equation.
b. What amount of net cash flow from operating activities would be reported on the 2012 cash
flow statements?
c. What amount of interest expense would be reported on the 2012 income statement?
d. What amount of total liabilities would be reported on the December 31, 2012, balance sheet?
e. What amount of retained earnings would be reported on the December 31, 2012, balance sheet?
f. What amount of cash flow from financing activities would be reported on the 2012 statement of cash
flows.
g. What amount of interest expense would be reported on the 2013 income statement?
h. What amount of cash flows from operating activities would be reported on the 2013 cash flow
statement?
i. What amount of assets would be reported on the December 31, 2013, balance sheet?
7 – 28 Current liabilities
The following selected transactions were taken from the books of Caledonia Company for 2012.
1. On March 1, 2012, borrowed $50,000 cash from the local bank. The note had a 6 percent interest rate and was due on September 1, 2012.
2. Cash sales for the year amounted to $225,000 plus sales tax at the rate of 7 percent .
3. Caledonia provides a 90 day warranty on the merchandise sold. The warranty expense is estimated to be 2 percent of sales.
4. Paid the sales tax to the state sales tax agency on $190,000 of the sales.
5. Paid the note due on September 1 and the related interest.
6. On October 1, 2012, borrowed $40,000 cash from the local bank. The note had a 7 percent
Interest rate and a one year term to maturity.
7. Paid $3,600 in warranty repairs
8. A customer has filed a lawsuit against Caledonia for $100,000 for breach of contract. The
Company attorney does not believe the suit has merit.
Required
a. Answer the following questions.
(1)What amount of cash did Caledonia pay for interest during the year?
(2)What amount of interest expense is reported on Caledonia’s income statement for the year?
(3) What is the amount of warranty expense for the year?
b. Prepare the current liabilities section of the balance sheet at December 31, 2012.
c. Show the effect of these transactions on the financial statements using a horizontal
statements model like the one shown here. Use a + to indicate increase, a – for decrease, and
NA for not affected. In the Cash Flow column, indicate whether the item is an operating
Activity (OA), investing activity (IA), or financing activity (FA). The first transaction is recorded
as an example.
|
Assets
|
=
|
Liabilities
|
+
|
Equity
|
Rev
|
–
|
Exp
|
=
|
Net Inc.
|
Cash Flow
|
|
+
|
|
+
|
|
NA
|
NA
|
|
NA
|
|
NA
|
+ FA
|
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