Question

1. On June 1, Year 1, Speights Co. loaned Brown Co. $10,000. Brown Co. was required to sign an 18 month promissory note (repayment on 12/1/ Year 2). The interest rate is 5%. How much cashflows from operations will Speights Co. report on their Year 2 statement of cashflows? Assume Speights Co. has a December 31st year end.

A) $500

B)$458

C) $-0-

D) $292

E) $750

2. On July 1, Year 1, Speights Co. loaned Brown Co. $10,000. Brown Co. was required to sign an 18-month promissory note (repayment on 1/1/ Year 3). The interest rate is 5%. If the year-end adjustment is properly recorded, what will be the total amount of assets (rounded) that Speights Co. will report on their Year 1 balance sheet? Assume Speights Co. has a December 31st year end.

A) $10,500

B) $10,250

C) $9,500

D) $9,750

E) $10,000

Answer 1

1.

for year 1, interest will be recorded for 7 months, i.e from June 1 to December 31.

In the year 2, interest will be recorded for 11 months.

Interest revenue for year 2 = Note receivable x Interest rate x Time period

= 10,000 x 5% x 11/12

= $458

Correct option ix B.

Speights Co. will record cash flow from operating on Year 2 statement of cash flows = $458.

2.

Interest receivable on December 31 = Note receivable x Interest rate x Time period

= 10,000 x 5% x 6/12

= $250

Total assets to be reported on the year 1 balance sheet = Note receivable + Interest receivable

= 10,000+250

= $10,250

Correct option is B.

Kindly give a positive rating if you are satisfied with this solution and please ask if you have any query.

Thanks