Question

Mott Company has a line of credit with Bay Bank. Mott can borrow up to $600,000 at any time over the course of the 2018 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2018. Mott agreed to pay interest at an annual rate equal to 1 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Mott pays 5 percent (4 percent + 1 percent) annual interest on $84,000 for the month of January.

Month	Amount Borrowed or (Repaid)						Prime Rate for the Month, %
January		$	84,000					4
February			60,000					4
March			(55,000	)				5
April through October	No change						No change
November			(40,000	)				5
December			(25,000	)				4

Mott earned $45,000 of cash revenue during 2018.

Prepare an income statement, balance sheet, and statement of cash flows for 2018.

Answer 1

Step 1: Calculate Interest Expense

The value of interest expense is arrived as below:

Month	Amount Borrowed (Repaid)	Balance at the End of Month [A]	Interest Rate Per Month [B]	Interest Expense [A*B]
January	84,000	84,000	0.00417	350
February	60,000	1,44,000	0.00417	600
March	-55,000	89,000	0.00500	445
April	0	89,000	0.00500	445
May	0	89,000	0.00500	445
June	0	89,000	0.00500	445
July	0	89,000	0.00500	445
August	0	89,000	0.00500	445
September	0	89,000	0.00500	445
October	0	89,000	0.00500	445
November	-40,000	49,000	0.00500	245
December	-25,000	24,000	0.00417	100
Total				$4,855

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Step 2: Prepare Income Statement

The income statement is prepared as follows:

Mott Company
Income Statement
For the Year Ended December 2018
Service Revenue	45,000
Expenses:
Interest Expense	-4,855
Net Income	$40,145

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Step 3: Prepare Balance Sheet

The balance sheet is given as follows:

Mott Company
Balance Sheet
As of December 31, 2018
Assets:
Cash (24,000 + 40,145)	64,145
Total Assets		$64,145
Liabilities:
Loan Payable		24,000
Total Liabilities		24,000
Stockholder's Equity:
Common Stock	0
Retained Earnings	40,145
Total Stockholder's Equity		40,145
Total Liabilities and Stockholder's Equity		$64,145

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Step 3: Prepare Cash Flow Statement

The cash flow statement is prepared as below:

Mott Company
Cash Flow Statement
For the Year Ended December 2018
Cash Flow from Operating Activities
Cash Inflow from Service Revenue	45,000
Cash Outflow of Interest	-4,855
Net Cash Flow from Operating Activities		40,145
Cash Flow from Investing Activities		0
Cash Flow from Financing Activities:
Cash Inflow from Loan/Borrowing	144,000
Cash Outflow for Repayment of Loan	-120,000
Net Cash Flow from Financing Activities		24,000
Net Change in Cash (40,145 + 0 + 24,000)		$64,145
Add Beginning Cash Balance		$0
Ending Cash Balance		$64,145