Problem 9-27B Accounting for a discount note—two accounting cycles

Ball Company was started in Year 1. The following summarizes transactions that occurred during Year 1:

1. Issued a $40,000 face value discount note to Golden Savings Bank on April 1, Year 1. The note had a 6 percent discount rate and a one-year term to maturity.
2. Recognized revenue from services performed for cash, $130,000.
3. Incurred and paid $98,000 cash for selling and administrative expenses.
4. Amortized the discount on the note at the end of the year, December 31, Year 1.
5. Prepared the necessary closing entries at December 31, Year 1.

The following summarizes transactions that occurred in Year 2:

1. Recognized $215,000 of service revenue in cash.
2. Incurred and paid $151,000 for selling and administrative expenses.
3. Amortized the remainder of the discount for Year 2 and paid the face value of the note.
4. Prepared the necessary closing entries at December 31, Year 2.

Required

a. Show the effects of each of the transactions on the elements of the financial statements, using a horizontal statements model like the one shown next. Use + for increase, − for decrease, and NA for not affected. The first transaction is entered as an example. (Hint: Closing entries do not affect the statements model.)

b. Prepare 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.