Question

Malco Enterprises issued $16,000 of common stock when the company was started. In addition, Malco borrowed $42,000 from a local bank on July 1, Year 1. The note had a 8 percent annual interest rate and a one-year term to maturity. Malco Enterprises recognized $79,100 of revenue on account in Year 1 and $91,200 of revenue on account in Year 2. Cash collections of accounts receivable were $67,300 in Year 1 and $77,500 in Year 2. Malco paid $44,400 of other operating expenses in Year 1 and $51,000 of other operating expenses in Year 2. Malco repaid the loan and interest at the maturity date.

Required
Based on this information given above, record the events in the accounting equation and answer the following questions. (Enter any decreases to account balances with a minus sign.)


a. What amount of interest expense would Malco report on the Year 1 income statement?
b. What amount of net cash flow from operating activities would Malco report on the Year 1 statement of cash flows?
c. What amount of total liabilities would Malco report on the December 31, Year 1, balance sheet?
d. What amount of retained earnings would Malco report on the December 31, Year 1, balance sheet?
e. What amount of net cash flow from financing activities would Malco report on the Year 1 statement of cash flows?
f. What amount of interest expense would Malco report on the Year 2 income statement?
g. What amount of net cash flow from operating activities would Malco report on the Year 2 statement of cash flows?
h. What amount of total assets would Malco report on the December 31, Year 2, balance sheet?
i. What amount of net cash flow from investing activities would Malco report on the Year 2 statement of cash flows?
j. If Malco Enterprises paid a $2,600 dividend during Year 2, what retained earnings balance would it report on the December 31, Year 2, balance sheet?
  

Answer 1

a. Interest Expense (Year 1) = $42000 x 8% x 6/12 = $1680

b.

Cash flow from Operating Activities
Cash Collected from customers	$        67,300
Cash paid for Operating expenses	$       -44,400
Cash from operating activities		$           22,900

c.

Liabilities
Interest Payable	$          1,680
Note Payable	$        42,000
Total Liabilities	$        43,680

d.

Retained Earnings
Beginning Balance	$                 -
Revenue	$        79,100
Expenses	$       -46,080
Ending Balance	$        33,020

e.

Cash flow from Financing Activities
Issue of common stock	$        16,000
Borrowed loan	$        42,000
Net Cash used in financing activities		$           58,000

f. Interest Expense (Year 1) = $42000 x 8% x 6/12 = $1680

g.

Cash flow from Operating Activities
Cash Collected from customers	$        77,500
Cash paid for Operating expenses	$       -51,000
Cash paid for Interest expenses	$         -3,360
Cash from operating activities		$           23,140

h. Assuming Dividend is not paid

Assets
Cash	$        62,040
Accounts Receivable	$        25,500
Total Assets	$        87,540

Assuming Dividend is paid

Assets
Cash	$        59,440
Accounts Receivable	$        25,500
Total Assets	$        84,940

i.
Cash Flow from Investing activities = $0

j.

Retained Earnings
Beginning Balance	$        33,020
Revenue	$        91,200
Expenses	$       -52,680
Dividend	$         -2,600
Ending Balance	$        68,940