Assume that the B Bank was organized on January 1 last year, issuing $2,000,000 of nopar common stock.

• B immediately began to accept deposits from the public and had accumulated $3,000,000 in deposits by the end of the year.
• On July 1 of that year B made a loan of $500,000 to the Y Manufacturing Corporation, receiving a one-year note receivable with interest of eight percent payable at maturity (on the following June 30).
• On August 1, B invested $1,000,000 in six percent, twenty-year, $1,000 government bonds. The annual interest of $60 per bond was payable in quarterly installments, beginning on October 31 of that year, when B collected $15,000.
• B also invested $2,800,000 in listed marketable securities, on which B received $250,000 in cash dividends during the year.
• Bs total expenses of $180,000 for the year were for interest on its deposits. $40,000 of the $180,000 represented accrued interest owed to depositors, the remaining $140,000 was paid in cash during the year.

1. Prior to the accounting for the bonus payment, prepare a balance sheet and income statement for the first calendar year of business for Bank B in accordance with GAAP. Assume a 25% income tax rate.
2. To how much additional compensation is the president of Bank B entitled under a contract which provides for a bonus of ten percent of annual net profits, computed before deduction of the bonus and taxes? Show your calculation, including identifying the line item in the financial statements from which each number was taken, if any.

HINTS:

1. It is highly recommended that you follow this procedure:
   1. Journalize the transactions for the period. The bank engages in both borrowing and lending transactions, so think carefully about what their role is for each transaction. It may be easier to wait to write the income tax entry until after you have arrived at pretax income on the income statement (step c). Assume that taxes are not paid in cash before the end of the year. Use the following accounts:

Accrued interest expense payable

Accrued interest income receivable

Cash

Common stock

Deposits

Dividend income

Government bonds

Income tax expense

Income tax payable

Interest expense

Interest income

Loan receivable

Marketable securities

Retained earnings

2. Post the entries to T-accounts. Produce the income statement using the ending balances from income statement item T-accounts. Note that the income statement for a bank looks different from other entities. There is no sales revenue. The primary sources of income are interest income and dividend income. Remember that all financial statements start with a heading. If you havent already, write the income tax journal entry and post it to the appropriate T-accounts.
3. Close the temporary accounts (revenues and expenses) to retained earnings. Note that net income on your income statement should equal the post-closing balance in the retained earnings T-account (since this is the banks first year in operation).
4. Produce the balance sheet using the ending balances in your balance sheet item T-accounts. If it doesnt balance at first, dont panic. Troubleshooting suggestions:
   1. Check your math.
   2. Review each journal entry. Did you use the proper accounts? Did you mix up your debits and credits? Remember: debits increase assets and expenses; credits increase liabilities, equity, and revenues.
   3. Check that you properly transferred the journal entries to the T-accounts.
   4. Check that you properly transferred the T-account balances to the balance sheet.
   5. Make sure you have properly classified the accounts as asset, liability, or equity accounts.