Exercise 1

The Firebird Company had the following transactions involving notes payable.

June 1, 2022 Borrows $70,000 from First National Bank by signing a 9-month, 12% note.

Dec. 1, 2022 Borrows $90,000 from Sycamore State Bank by signing a 3-month, 10% note.

Dec 31, 2022 Prepares adjusting entires

Mar. 1, 2023 Pays principal and interest to Sycamore State Bank.

Mar. 1, 2023 Pays principal and interest to First National Bank\

Instructions:

(a) Prepare journal entries for each of the transactions shown above.

(b) What effect do the 12/31/22 entries have on assets, liabilities, and stockholders equity?

What amount of interest expense is reported in the 2022 income statement and in the 2023 income statement?

Exercise 2

The following financial data were reported by XYZ Company for 2021 and 2022 (dollars in millions)

XYZ Company

Balance Sheets (partial)

2022 2021

Current assets

Cash and cash equivalents $2,000 $1,100

Accounts receivable, net 3,900 3,000

Inventories 2,700 2,300

Other current assets 700 1,150

Total current assets 9,300 7,550

Current liabilities 7,700 5,500

(a) Calculate the current ratio and working capital for XYZ for 2022 and 2021.

(b) Suppose at the end of 2022, XYZ management used $400 million cash to pay off $400 million of accounts payable. How would the current ratio and working capital have changed?

Suppose at the end of 2022, XYZ management used $400 million of accounts payable. How would the current ratio and working capital have changed?