Question

Helen Parish started a design company on January 1, 2016. On April 1, 2016, Parish borrowed cash from a local bank by issuing a one-year $42,400 face value note with annual interest based on an 12 percent discount. During 2016, Parish provided services for $37,950 cash. Required Answer the following questions. Record the events in T-accounts prior to answering the questions. (Select "1, 2, or 3" for the transactions in the order they take place. Round your answers to nearest dollar amount.) a. What is the amount of total liabilities on the December 31, 2016, balance sheet? (Round your answer to nearest dollar amount.) b. What is the amount of net income on the 2016 income statement? (Round your intermediate calculations and final answer to nearest dollar amount.) c. What is the amount of cash flow from operating activities on the 2016 statement of cash flows? d. Provide the general journal entries necessary to record issuing the note on April 1, 2016; recognizing accrued interest on December 31, 2016; and repaying the loan on March 31, 2017. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to nearest dollar amount.)

Answer 1

Solution:

T-Accounts

	Debit		Credit
		Revenue earned	$37,950
Notes Payable
	Debit		Credit
		April.1, 2016 Borrowed Cash	$42,400
Interest Expense
	Debit		Credit
Dec.31, 2016	$3,816
Interest Payable
	Debit		Credit
		Dec.31, 2016 (42400*12%*9/12)	$3,816
Cash
	Debit		Credit
April.1, 16 Borrowed Cash	$42,400

Part a --

Total Liabilities on Dec 31, 2016 = Notes payable + Interest Payable = 42,400 + 3,816 = $46,216

Part b –

Net Income 2016 = Service Revenue – Interest Expense = $37,950 – 3,816 = $34,134

Part c –

Cash Flow from operating activities 2016 = service revenue = $37,950

Cash flow from Operating activities means the cash used or generated from core principal activities of business. It involves revenue from sale of goods or rendering of services.

Part d – Journal entries

Date	General Journal	Debit	Credit
April.1, 2016	Cash	$42,400
	Notes Payable		$42,400
Dec.31, 2016	Interest Expense	$3,816
	Interest Payable		$3,816
March.31, 2017	Notes Payable	$42,400
	Interest Payable	$3,816
	Interest Expense (42,400*12%*3/12)	$1,272
	Cash		$47,488

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