Problem 1:
Effect of accrued interest on financial statements
Norman Co. borrowed $15,000 from the local bank on 1st April, 2012, when the company was started. The note had an 8 % annual interest rate and a one-year term to maturity. Norman Co. identifies $42,000 of revenue on account in 2012 and $56,000 of revenue on account in 2013. Cash collections 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 interest and loan at the maturity date.
Required
a. Classify the information in accounts under an accounting equation.
b. Determine total cash flow from operating activities would be reported on the 2012 cash flow statement?
c. Evaluate interest expense would be reported on the 2012 income statement?
d. Determine total liabilities would be reported on the 31st December, 2012, balance sheet?
e. Evaluate retained earnings would be reported on the 31st December, 2012, balance sheet?
f. What amount of cash flow from financing activities could be reported on the 2012 statement of cash flows?
g. Determine interest expense would be reported on the 2013 income statement?
h. Determine cash flows from operating activities would be reported on the 2013 cash flow statement?
I. What amount of assets would be reported on the 31st December, 2013, balance sheet?
Problem 2:
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 1st October, 2012, borrowed $40,000 cash from the local bank. The note had a 7 % 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 subsequent questions: (1) what amount of cash did Caledonia pay for interest through the year? (2) Evaluate interest expense is reported on Caledonia's income statement for the year? (3) Determine the amount of warranty expense for the year?
b. Prepare the existing liabilities section of the balance sheet at 31st December, 2012. c. Show the effect of these transactions on the financial statements using a horizontal statements model like the one shown here. Use a 1 to show increase, a 2 for decrease, and NA for not affected. In the Cash Flow column, show whether the item is an operating activity (OA), financing activity (FA) or investing activity (IA).