Problem 9-27A: Accounting for a Discount Note Across Two Accounting Cycles

Don Terry started Terry Company, an accounting practice, in Year 1. The following is a summary of transactions that occurred during Year 1:

1. On July 1, Year 1, a $120,000 face value discount note was issued to First National Bank. The note had an 8 percent discount rate and a one-year term to maturity.
2. Cash revenue of $310,000 was recognized.
3. Operating expenses of $145,000 were incurred and paid.
4. The books were adjusted to recognize interest expense as of December 31, Year 1.
5. Necessary closing entries were made on December 31, Year 1.

The following is a summary of transactions for Year 2:

1. Cash revenue of $346,000 was recognized.
2. Operating expenses of $178,000 were incurred and paid.
3. Interest expense for Year 2 was recognized, and the face value of the note was paid.
4. Necessary closing entries were made on December 31, Year 2.

Required

a. Show the effects of each transaction on the elements of the financial statements, using a horizontal statements model. Use "+" for increase, "−" for decrease, and "NA" for not affected. The first transaction should be entered as an example. (Note: Closing entries do not affect the statements model.)

b. Prepare the journal entries in general journal form for the transactions for Year 1 and Year 2, and post them to T-accounts.

c. Prepare an income statement, statement of changes in stockholders' equity, balance sheet, and statement of cash flows for Year 1 and Year 2.