Song Company has a line of credit with State Bank. Song can borrow up to \(\$ 200,000\) at any time over the course of the 2011 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2011. Song agreed to pay interest at an annual rate equal to 2 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, Song pays 7 percent ( 5 percent +2 percent) annual interest on \(\$ 100,000\) for the month of January.

Song earned \(\$ 30,000\) of cash revenue during 2011.

Required

a. Prepare an income statement, balance sheet, and statement of cash flows for 2011. (Note: Round computations to the nearest dollar.)

b. Write a memo to explain how the business was able to generate retained earnings when the owner contributed no assets to the business.