Don Terry opened Terry Company, an accounting practice, in Year 1. The following summarizes transactions that occurred

Question:

Don Terry opened Terry Company, an accounting practice, in Year 1. The following summarizes transactions that occurred during Year 1:
1. Issued a $120,000 face value discount note to First National Bank on July 1, Year 1. The note had an 8 percent discount rate and a one-year term to maturity.
2. Recognized cash revenue of $310,000.

3. Incurred and paid $145,000 of operating expenses.
4. Adjusted the books to recognize interest expense at December 31, Year 1.

The following summarizes transactions that occurred in Year 2:
1. Recognized $346,000 of cash revenue.
2. Incurred and paid $178,000 of operating expenses.
3. Recognized the interest expense for Year 2 and paid the face value of the note.

Required
a. Show the effects of each of the transactions on the elements of the financial statements, using a horizontal statements model like the one shown next. Use + for increase, − for decrease, and NA for not affected. The first transaction is entered as an example.

Income Statement Balance Sheet Statement of Cash Flows Event No. Rev. - Exp. Assets = Llab. + Stk. Equity Net Inc. NA 1.

b. Prepare an income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Year 1 and Year 2.

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...

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