Exercise 9-16B: Effect of a discount note on financial statements

Mark Miller started a moving company on January 1, Year 1. On March 1, Year 1, Miller borrowed cash from a local bank by issuing a one-year $80,000 face value note with annual interest based on a 12 percent discount. During Year 1, Miller provided services for $65,400 cash.

Required

Answer the following questions. Record the events in T-accounts prior to answering the questions.

a. What is the amount of total liabilities on the December 31, Year 1, balance sheet?

b. What is the amount of net income on the Year 1 income statement?

c. What is the amount of cash flow from operating activities on the Year 1 statement of cash flows?

d. Provide the general journal entries necessary to record issuing the note on March 1, Year 1; recognizing accrued interest on December 31, Year 1; and repaying the loan on February 28, Year 2.

Exercise 9-17B: Comparing effective interest rates on discount versus interest-bearing notes (Appendix)

Jim Hanks borrowed money by issuing two notes on January 1, Year 1. The financing transactions are described next.

1. Borrowed funds by issuing a $60,000 face value discount note to State Bank. The note had an 8 percent discount rate, a one-year term to maturity, and was paid off on December 31, Year 1.
2. Borrowed funds by issuing a $60,000 face value, interest-bearing note to Community Bank. The note had an 8 percent stated rate of interest, a one-year term to maturity, and was paid off on December 31, Year 1.

Required

a. Show the effects of issuing the two notes on the financial statements using separate horizontal financial statement models like those shown next. Record the transaction amounts under the appropriate categories. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Record only the events occurring on the date of issue. Do not record accrued interest or the repayment at maturity.

b. What is the total amount of interest to be paid on each note?

c. What amount of cash was received from each note when it was issued?

d. Which note has the higher effective interest rate? Support your answer with appropriate computations.

Exercise 9-18B Recording accounting events for a discount note (Appendix)

Bricca Co. issued a $60,000 face value discount note to First Bank on June 1, Year 1. The note had a 6 percent discount rate and a one-year term to maturity.

Required

Prepare general journal entries for the following transactions:

a. The issuance of the note on June 1, Year 1.

b. The adjustment for accrued interest at the end of the year, December 31, Year 1.

c. Recording interest expense for Year 2 and repaying the principal on May 31, Year 2.