ACCT 2100 (W01) - Chapter 7 Study

Bill Darby started Darby Company on January 1, 2018. The company experienced the following events during its first year of operation: 1. Earned $16,200 of cash revenue. 2. Borrowed $12,000 cash from the bank. 3. Adjusted the accounting records to recognize accrued interest expense on the bank note. The note, issued on September 1, 2018, had a one-year term and an 8 percent annual interest rate. Effect on financial statement?

--Event 1-- Cash increase RE increase Rev increas NI increase Cash OA increas --Event 2-- cash increase notes payable increase cash FA increase --Event 3-- interest payable increase RE decrease expenses increase NI decrease

Bill Darby started Darby Company on January 1, 2018. The company experienced the following events during its first year of operation: 1. Earned $16,200 of cash revenue. 2. Borrowed $12,000 cash from the bank. 3. Adjusted the accounting records to recognize accrued interest expense on the bank note. The note, issued on September 1, 2018, had a one-year term and an 8 percent annual interest rate. Interest expense? Amount of cash?

1. Interest expense = principal x interest percentage x time outstanding Time outstanding: Sep - Dec IE = 12,000 * 0.08 * (4/12) = 320 2. Amount of cash NONE - only accrued

The business was started when the company received $50,000 from the issue of common stock. Purchased equipment inventory of $380,000 on account. Sold equipment for $510,000 cash (not including sales tax). Sales tax of 8 percent is collected when the merchandise is sold. The merchandise had a cost of $330,000. Provided a six-month warranty on the equipment sold. Based on industry estimates, the warranty claims would amount to 2 percent of sales. Paid the sales tax to the state agency on $400,000 of the sales. On September 1, 2018, borrowed $50,000 from the local bank. The note had a 4 percent interest rate and matured on March 1, 2019. Paid $6,200 for warranty repairs during the year. Paid operating expenses of $78,000 for the year. Paid $250,000 of accounts payable. Recorded accrued interest on the note issued in transaction no. 6.

1. Sales revenue = 510,000 2. COGS = (330,000) 3. GM = Sales rev - COGS = 510,000 - 330000 = 180,000 4. Operating expenses = (78,000) 5. Warranty expenses = 0.02 * 510,000 = (10,200) 6. Total operating expenses = 78,000 + 10,200 = 88,200 7. Operating income = 91800 [GM - Total Operating expenses = 180000 - 88200] 8. Interest expense = 50,000 * 0.04 * (4/12) = 667 9. Net Income = Operating income - Interest expense = 91800 - 667 = 91133

Dan Dayle started a business by issuing an $80,000 face value note to First State Bank on January 1, 2018. The note had an 8 percent annual rate of interest and a five-year term. Payments of $20,037 are to be made each December 31 for five years. Interest expense and principal in Dec 2018?

1.Interest expense 0.08 * 80,000 = 6400 2. Principal = 20,037 - 6400 = 13637

Currie Company borrowed $29,000 from the Sierra Bank by issuing a 11% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $11,867. Based on this information, the amount of the interest expense associated with the second payment would be: (Round your answer to the nearest dollar.)

125, Exhibit 7.3 Annual payments of 11867 Principal Balance = original loan Cash Payment = agreed installment Interest Paid = balance * rate Principal Paid = cash payment - interest paid 1. First Year Principal Balance: 29000 Cash Payment: 11867 Interest Paid: 29000 * 0.11 = 3190 Principal Paid: 11867 - 3190 = 8677 New Principal balance: 29000 - 8677 = 20323 2. Second Year Principal Balance: 20,323 Cash Payment: 11867 Interest Paid: 20323 * 0.11 = 2236 < ANSWER

Kier Company issued $500,000 in bonds on January 1, Year 1. The bonds were issued at face value and carried a 3-year term to maturity. They had a 5.50% stated rate of interest that was payable in cash on December 31st. Based on this information alone, the amount of interest expense shown on the December 31, Year 1 income statement and the cash flow from operating activities shown on the December 31, Year 1 statement of cash flows would be:

500,000 * 0.055 = 27,500 Interest Expense: 27500 Cash Outflow: 27500 Payment of interest on December 31, Year 1 increases interest expense by $27,500 and is reported as a cash outflow for operating activities.

Which of the following represents the impact of a taxable cash sale of $1,250 on the accounting equation if the sales tax rate is 4%?

An increase to cash for $1,300, an increase to sales tax PAYABLE for $50, and an increase to sales revenue for $1,250. The transaction is recorded as an increase to cash of $1,300, the amount of the sale, plus the 4% sales tax collected, an increase to sales tax payable of $50, the amount owed to the state, and an increase to sales revenue of $1,250, the amount of the sale

Which of the following represents the impact of a taxable cash sale of $600 on the accounting equation if the sales tax rate is 4%?

An increase to cash for $624, an increase to sales tax payable for $24, and an increase to sales revenue for $600

Ch 7 Practice Questions

Ch 7 Practice Questions

Ch7 HW

Ch7 HW

Dan Dayle started a business by issuing an $80,000 face value note to First State Bank on January 1, 2018. The note had an 8 percent annual rate of interest and a five-year term. Payments of $20,037 are to be made each December 31 for five years. What is the principal balance on January 1, 2019?

Initial principal - principal portion 80000 - 13637 (see last slide) = 66363

Kier Company issued $660,000 in bonds on January 1, Year 1. The bonds were issued at face value and carried a 5-year term to maturity. They had a 6.00% stated rate of interest that was payable in cash on December 31st. Based on this information alone, the amount of interest expense shown on the December 31, Year 1 income statement and the cash flow from operating activities shown on the December 31, Year 1 statement of cash flows would be:

Interest is paid in cash, so both are affected Interest Expense: 660,000 * .0.06 = 39,600 Cash Outflow: 39,600

Monthly remittance of sales tax:

Pg 250 ANSWER: Reduces liabilities. Why? Decreases cash and sales tax liability. No effect on equity or income statement. Cash outflow OA.

Dan Dayle started a business by issuing an $80,000 face value note to First State Bank on January 1, 2018. The note had an 8 percent annual rate of interest and a five-year term. Payments of $20,037 are to be made each December 31 for five years. What portion of the December 31, 2019, payment is applied to interest expense and principal?

Remaining principal balance: 66363 Interest expense: 66363 * 0.08 = 5309.04 = 5309 Principal: 20,037 - 5309 = 14728

Under what condition is a pending lawsuit recognized as a liability on a company's balance sheet?

The outcome is probable and can be reasonably estimated.

Currie Company borrowed $14,000 from the Sierra Bank by issuing a 11% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $5,729. Based on this information, the amount of the interest expense associated with the second payment would be: (Round your answer to the nearest dollar.)

Year 1 Principal: 14000 Cash Payment: 5729 1. Calculate interest portion of cash payment 14,000 * 0.11 = 1540 2. Calculate principal portion 5729 - 1540 = 4189 --NEXT YEAR-- 3. Calculate Year 2 Principal Y1 Principal - Y1 Principal portion 14,000 - 4189 = 9811 4. Calculate interest portion of cash payment 9811 * 0.11 = 1079.21 ANSWER: 1079

Madison Company issued an interest-bearing note payable with a face amount of $12,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

ZERO These are all financing activities! The $12,000 borrowed is classified as a financing activity, not an operating activity. No interest was paid in Year 1, so there is no cash flow related to the interest.

Madison Company issued an interest-bearing note payable with a face amount of $9,600 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. The amount of cash flow from operating activities on the Year 1 statement of cash flows would be:

ZERO These are all financing activities! The $12,000 borrowed is classified as a financing activity, not an operating activity. No interest was paid in Year 1, so there is no cash flow related to the interest.