Question

The following transactions apply to Pecan Co. for Year 1, its first year of operations:

1. Received $38,000 cash in exchange for issuance of common stock.
2. Secured a $101,000 ten-year installment loan from State Bank. The interest rate is 6 percent and annual payments are $13,723.
3. Purchased land for $20,000.
4. Provided services for $115,000.
5. Paid other operating expenses of $39,000.
6. Paid the annual payment on the loan.

Required

1. Organize the transaction data in accounts under an accounting equation.
2. Prepare an income statement and balance sheet for Year 1.
3. What is the interest expense for Year 2? Year 3?

The following transactions apply to Pecan Co. for Year 1, its first year of operations:

1. Received $38,000 cash in exchange for issuance of common stock.
2. Secured a $101,000 ten-year installment loan from State Bank. The interest rate is 6 percent and annual payments are $13,723.
3. Purchased land for $20,000.
4. Provided services for $115,000.
5. Paid other operating expenses of $39,000.
6. Paid the annual payment on the loan.

Required

1. Organize the transaction data in accounts under an accounting equation.
2. Prepare an income statement and balance sheet for Year 1.
3. What is the interest expense for Year 2? Year 3?

PECAN COMPANY Effect of Events on the Accounting Equation Event No. Assets = Liabilities + Stockholders' Equity Account Titles for Retained Earnings Cash + Land = Note Payable + Common Stock + Retained Earnings Year 1 1. + = + + 2. + = + + 3. + = + + 4. + = + + 5. + = + + 6. + = + + Bal. 0 + 0 = 0 + 0 + 0

	PECAN COMPANY Income Statement For the Year Ended December 31, Year 1 Non-operating items:

	PECAN COMPANY Balance Sheet As of December 31, Year 1 Assets Total assets $0 Liabilities Total liabilities 0 Stockholders' Equity Total stockholders' equity 0 Total liabilities and stockholders' equity $0

	Year 2 Year 3 Interest expense

Answer 1

Req.1

PECAN COMPANY
Effect of Events on the Accounting Equation
Event No.	Assets			=	Liabilities	+	Stockholders' Equity			Account Titles for Retained Earnings
	Cash	+	Land	=	Note Payable	+	Common Stock	+	Retained Earnings
Year 1
1.	+38,000	+		=		+	$38,000	+
2.	+101,000	+		=	$101,000	+		+
3.	-20,000	+	$20,000	=		+		+
4.	+115,000	+		=		+		+	$115,000	Service Revenue
5.	-39,000	+		=		+		+	-39,000	Operating Expense
6.	-13,723	+		=	- 7663	+		+	-6060	Interest Exp
Bal.	$181,277	+	20,000	=	$93,337	+	$38,000	+	$69,940

Note:

1) Interest Expense:

$ 101,000 × 6%= $6060

2) Loan Repayment :

= Total Installment - Interest

= $ 13,723 -6060 = $7663

Req. 2

PECAN COMPANY
Income Statement
For the Year Ended December 31, Year 1
Service Revenue	$ 115,000
Less: Operating Expense	($39,000)
Operating Income	$76,000
Non Operating Item:
Interest Expense	($6060)
Net Income	$ 69,940

Req.3

PECAN COMPANY
Balance Sheet
As of December 31, Year
Assets:
Cash	$ 181,277
Land	$20,000
Total Assets	$201,277
Liabilities
Note Payable	$93,337
Total Liabilities (a)	$93,337
Stockholder's Equity
Common stock	$38,000
Retained Earnimgs	$69,940
Total stockholders' equity ( b)	$107,940
Total liabilities and stockholders' equity ( a+b)	$201,277

Req. 4

	year 2	year 3
Interest Expense	$5600.22	$5112.85

Explanation:

1) $ 93,337 ×6% = $ 5600.22

Amount Paid : $ 13,723 - 5600.22 = $ 8122.78

2) Loan remained in 3rd year

( $ 93,337 - 8122.78) = $85,214.22

3) Interest exp.

$ 85,214.22 ×6%= $5112.85