On January 1, 2018, Brown Co. borrowed cash from First Bank by issuing a $42,000
ID: 2414302 • Letter: O
Question
On January 1, 2018, Brown Co. borrowed cash from First Bank by issuing a $42,000 face value, four-year term note that had an 6 percent annual interest rate. The note is to be repaid by making annual cash payments of $12,121 that include both interest and principal on December 31 of each year. Brown used the proceeds from the loan to purchase land that generated rental revenues of $22,260 cash per year.
Prepare an income statement, a balance sheet, and a statement of cash flows for each of the four years.
Explanation / Answer
Working:
Brown Co. Income Statement For the Year Ended December 31 2018 2019 2020 2021 Rental revenue 22260 22260 22260 22260 Expenses: Interest expense 2520 1944 1333 687 Net income 19740 20316 20927 21573 Brown Co. Balance Sheet December 31 2018 2019 2020 2021 Assets Cash 10139 20278 30417 40556 Land 42000 42000 42000 42000 Total assets 52139 62278 72417 82556 Liabilities and Owner's Equity Note payable 32399 22222 11434 0 Retained earnings 19740 40056 60983 82556 Total liabilities and owner's equity 52139 62278 72417 82556 Brown Co. Statement of Cash Flows For the Year Ended December 31 2018 2019 2020 2021 Cash flow from operating activities Cash collected for rental revenue 22260 22260 22260 22260 Cash paid for interest -2520 -1944 -1333 -687 Net cash provided (used) by operating activities 19740 20316 20927 21573 Cash flow from investing activities Purchase of land -42000 0 0 0 Net cash provided (used) by investing activities -42000 0 0 0 Cash flow from financing activities 0 0 0 0 Borrowing on notes payable 42000 0 0 0 Repayment of borrowings -9601 -10177 -10788 -11434 Net cash provided (used) by financing activities 32399 -10177 -10788 -11434 Net increase (decrease) in cash 10139 10139 10139 10139 Beginning cash balance 0 10139 20278 30417 Ending cash balance 10139 20278 30417 40556