Question

5. Consider the following transaction: Truckitall Enterprises buys a new truck for $100,000. They make a $10,000 down payment on the truck, and take out a loan for the other $90,000, on which they will pay 12% interest. The loan will be paid down over 5 years in monthly payments; each payment will consist of $1500 in principal plus 1% interest on the loan balance. The truck is expected to have a useful life of 10 years, and will have a residual value of $10,000 at the end of the 10 years.

a. What impact will this transaction have at the time of the purchase on the following statements:

1. The income statement

2. The balance sheet

3. The cash flow statement

b. At the end of the first month after the truck is put into service, what impact will the truck have on each of the financial statements?

i. The income statement

ii. The balance sheet

iii. The cash flow statement

Truckitall’s accounts receivable as of November 30, 2016 were $1.5 million. During December, they had sales of $1.2 million and collected $900,000 in customer payments.

a. (2) What is the level of their accounts receivable on December 31?

b. (2) What effect did the change in accounts receivable have on cash?

Answer 1

A	B	C	D	E	F	G	H	I	J	K
2
3		5)
4
5		Price of Truck	$100,000
6		Cash Payment	$10,000
7		Loan payable	$90,000
8
9		a)
10
11		At the time of purchase $10,000 cash has been paid and loan of $90,000 has been raised to buy the truck.
12
13		i)
14
15		Income Statement statement will have no effect as the fixed asset has been
16		purchase which will be expensed over its life.
17
18		ii)
19		Since, at the time of purchase $10,000 cash has been paid and loan of $90,000 has been raised to buy the truck,
20		Therefore
21
22		Fixed Asset will increase by	$100,000
23		Cash Will decrease by	$10,000
24		Liability of loan payable will increase by	$90,000
25
26		iii)
27
28		Cash flow statement is affected by the actual cash transaction.
29		Since the truck has been purchased using $10,000 cash and $90,000 loan,
30		therefore there will be decrease in cash from investing activities by $10,000.
31
32		b)
33		Price of Truck	$100,000
34		Expected Life	10	Years
35		Residual Value	$10,000
36
37		Depreciation per year	=(Purchase Price - Residual Value)/Expected Life
38			=($100,0000-$10,000)/10
39			9000	=(D33-D35)/D34
40
41		Depreciation per month	=9000/12
42			$750	=D39/12
43
44		Loan Balance at the beginning of the month	$90,000
45		Interest rate	1%	per month
46
47		Principle paid at the end of month	$1,500
48		Interest paid at the end of month	=Loan Balance*Monthly Interest rate
49			=90,000*1%
50			$900	=D44*D45
51