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Semester Case – Cowboy Ice Cream, Inc. (CIC)
Last class period we discussed a possible expansion by CIC whereby they would purchase a building, land, and new equipment. In order to finance such an expansion CIC would borrow $800,000. CIC is currently considering possible options for this borrowing.Prepare amortization schedules for each of the following, rounding all computations to the nearest whole dollar. Assume 8% interest applies to each option and all borrowings would originate on January 1, 2019.
Option #1:
Issue a note with the principal and interest due in 18 months. Interest and principal are payable in cash on June 30, 2020.
Option #2
Issue a note with the principal due in 5 years with interest payable annually on December 31.
Option #3
Issue a note to repay $160,000 of the principal due each year on December 31 for 5 years along with the annual interest due.
Option #4
Issue a note to make equal annual payments of $200,365 each year on December 31 for 5 years.
Option #1
Year
Pmt #
Balance January 1
Total Cash Paid
Interest Expense
Principal Reduction
Balance December 31
2019
1
$800,000
2020
2
2021
3
2022
4
2023
5
Option #2
Year
Pmt #
Balance January 1
Total Cash Paid
Interest Expense
Principal Reduction
Balance December 31
2019
1
$800,000
2020
2
2021
3
2022
4
2023
5
Option #3
Year
Pmt #
Balance January 1
Total Cash Paid
Interest Expense
Principal Reduction
Balance December 31
2019
1
$800,000
2020
2
2021
3
2022
4
2023
5
Option #4
Year
Pmt #
Balance January 1
Total Cash Paid
Interest Expense
Principal Reduction
Balance December 31
2019
1
$800,000
2020
2
2021
3
2022
4
2023
5
As a condition of the borrowings described above, CIC will be required to provide financial statements, including a classified balance sheet, to the lender. W.T. would like to see a pro forma balance sheet if a borrowing is undertaken.
The account balances for December 31, 2018 for CIC are presented below. Only one additional adjustment is required. On January 31, 2018, CIC sold a parcel of land and received in return cash and a note receivable of $10,000, due January 31, 2019. The note carries interest at the rate of 8%, but interest has not been recorded for the current year. Record this adjustment by updating the accounting equation presented below.
Assume that CIC opts to borrow $800,000 under Option #2 presented above. Assume the borrowing takes place on January 1, 2019 as planned and no further transactions occur on that day. Add that transaction to the accounting equation below and then prepare a classified balance sheet for CIC for January 1, 2019.
Item
Cash
Accts Rec
Inven-tory
Note Rec
Truck
AccumDepr
Accts
Pay
Com
Stock
Ret Earn
Bal
76,000
12,000
6,500
10,000
50,000
8,250
3,750
75,000
67,500
Adj Int
Bal 12/31
Borrow
Bal 1/1
Cowboy Ice Cream, Inc.
Balance Sheet
January 1, 2019
ASSETS
LIABILITIES
Current Assets:
Current Liabilities:
Total Current Liabilities
Long-term Liabilities
Total Long-term Liabilities
Total Current Assets
Total Liabilities
Long-term Assets
STOCKHOLDERS’ EQUITY:
Total Long-term Assets
Total Stockholders’ Equity
Total Assets
Total Liabilities & Stockholders’ Equity
Additional Example
On August 1, 2018 a company borrows $25,000 by signing a two-year note. The note has an 8% annual interest rate and matures on August 1, 2020. Interest and principal are paid in cash on the maturity date.
Record all the transactions related to this loan.
Transactions
Balance Sheet
Income Statement
Cash Flow
Assets
Liabilities
Equity
Cash
Interest Payable
Note Payable
Retained Earnings
Rev
Exp
Net Income
Type
Amount
Balance on 7/1/18
$ 5,000
$ 5,000
8/1/18 – Borrow money
12/31/18 – Adjusting entry
12/31/19 – Adjusting entry
8/1/20 – Pay principal
8/1/20 – Pay interest
Balance on 8/31/20
Net Change in Cash
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