Mott Company has a line of credit with Bay Bank. Mott can borrow up to $600,000

Question

Mott Company has a line of credit with Bay Bank. Mott can borrow up to $600,000 at any time over the course of the 2018 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2018. 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 5 percent (4 percent + 1 percent) annual interest on $84,000 for the month of January.

Mott earned $45,000 of cash revenue during 2018.

Prepare an income statement, balance sheet, and statement of cash flows for 2018.

Month Amount Borrowed or (Repaid) Prime Rate for the Month, % January $ 84,000 4 February 60,000 4 March (55,000 ) 5 April through October No change No change November (40,000 ) 5 December (25,000 ) 4

Explanation / Answer

Step 1: Calculate Interest Expense

The value of interest expense is arrived as below:

_____

Step 2: Prepare Income Statement

The income statement is prepared as follows:

_____

Step 3: Prepare Balance Sheet

The balance sheet is given as follows:

_____

Step 3: Prepare Cash Flow Statement

The cash flow statement is prepared as below:

Month Amount Borrowed (Repaid) Balance at the End of Month [A] Interest Rate Per Month [B] Interest Expense [A*B] January 84,000 84,000 0.00417 350 February 60,000 1,44,000 0.00417 600 March -55,000 89,000 0.00500 445 April 0 89,000 0.00500 445 May 0 89,000 0.00500 445 June 0 89,000 0.00500 445 July 0 89,000 0.00500 445 August 0 89,000 0.00500 445 September 0 89,000 0.00500 445 October 0 89,000 0.00500 445 November -40,000 49,000 0.00500 245 December -25,000 24,000 0.00417 100 Total $4,855

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