Question

Mott Company has a line of credit with Bay Bank. Mott can borrow up to $570,000 at any time over the course of the calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during the year. 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 8 percent (7 percent + 1 percent) annual interest on $75,000 for the month of January. Month Amount Borrowed or (Repaid) Prime Rate for the Month, % January $ 75,000 7 February 57,000 7 March (50,000 ) 8 April through October No change No change November (36,000 ) 8 December (22,000 ) 7 Mott earned $42,000 of cash revenue during the year. Prepare an income statement, balance sheet, and statement of cash flows for the year.

Complete this question by entering your answers in the tabs below.

• Income Statement
• Balance Sheet
• Stmt of Cash Flows

Answer 1

1. Income statement

MOTT Company
Income statement
For the year ended December 31,
Cash Revenue	$42,000.00
Expenses
Interest expense	$6,805.00
Net Income	$35,195.00

2. Balance sheet

MOTT Company
Balance sheet (partial)
For the year ended December 31,
Assets
Current Assets
Cash (24,000+35,195)	$59,195.00
Total Assets	$59,195.00
Liabilities and stockholder's equity
Liabilities
Borrowings	$24,000.00
Total Liabilities
Stockholder's equity
Retained Earnings	$35,195.00
Total liabilities and stockholder's equity	$59,195.00

3.Statement of Cash Flows

MOTT Company
Statement of Cash Flows
For the year ended December 31
Cash flows from operating activities
Cash revenue earned	$42,000.00
Net cash flow from operating Activities		$42,000.00
Cash flow from Investing activiites
Cash flow from finaning activities
Amount borrowed during year	$132,000.00
Amount repaid during during	$(108,000.00)
Interest paid during year	$(6,805.00)
Net cash flow from Financing Activities		$17,195.00
Net change in cash		$59,195.00
Beginning cash balance
Ending cash balance		$59,195.00

Workings:

1.calulation of interest

Month	Amount borrowed/(repaid)	Oustanding Amount	Prime rate for month	applicable rate	Interest amount
January	$75,000.00	$75,000.00	7%	8%	$500.00
Feburary	$57,000.00	$132,000.00	7%	8%	$880.00
March	$(50,000.00)	$82,000.00	8%	9%	$615.00
april-october		$82,000.00	8%	9%	$4,305.00
november	$(36,000.00)	$46,000.00	8%	9%	$345.00
december	$(22,000.00)	$24,000.00	7%	8%	$160.00
				Total Interest	$6,805.00