Question

Doyle Company issued $480,000 of 10-year, 5 percent bonds on January 1, Year 2. The bonds were issued at face value. Interest is payable in cash on December 31 of each year. Doyle immediately invested the proceeds from the bond issue in land. The land was leased for an annual $57,000 of cash revenue, which was collected on December 31 of each year, beginning December 31, Year 2.

Required
a. Organize the transaction data in accounting equation for Year 2 and Year 3. (Enter any decreases to account balances with a minus sign. Select "NA" if there is no effect on the "Accounts Titles for Retained Earnings".)

b. Prepare the income statement, balance sheet, and statement of cash flows for Year 2 and Year 3.

Answer 1

Accounting equation for Year 2 and Year 3
Transaction	Assets		Liabilities	Stock holder's equity	Income statement
	Cash	Land	Bond payable	Retained earnings	Lease revenue	Interest expense	Net income
Issued of bond	480,000		480,000	-			-
Investment in land	(480,000)	480,000		-			-
Lease revenue	57,000			57,000	57,000		57,000
Interest expense on bond (480000*5%)	(24,000)			(24,000)		24,000	(24,000)
At end of year 2	33,000	480,000	480,000	33,000	57,000	24,000	33,000
Beginning balance	33,000	480,000	480,000	33,000			-
Lease revenue	57,000			57,000	57,000		57,000
Interest expense on bond (480000*5%)	(24,000)			(24,000)		24,000	(24,000)
At end of year 3	66,000	480,000	480,000	66,000	57,000	24,000	33,000
Net income is part of Retained earnings

Income statement
	Year 2	Year 3
Lease income	57,000	57,000
Less: interest income	24,000	24,000
Net income	33,000	33,000
Balance sheet
	Year 2	Year 3
Assets
Cash	33,000	66,000
Land	480,000	480,000
Total assets	513,000	546,000
Liability and stockholder's equity
Bond payable	480,000	480,000
Retained earnings	33,000	66,000
Total Liability and stockholder's equity	513,000	546,000
Cash flow statement
	Year 2	Year 3
Investing activity
Cash received from lease revenue	57,000	57,000
Less: Interest paid	24,000	24,000
Cash flow From Investing activity	33,000	33,000
Investing activity
Purchase of land	(480,000)
Financing activity
Issued of bond payable	480,000
Change in cash	33,000	33,000
Add: beginning cash	0	33,000
Ending cash	33,000	66,000