Question
Little Corp. was experiencing cash flow problems and was unable to pay its $105,000 account payable to Big Corp. when it felt due on Sep.
Little Corp. was experiencing cash flow problems and was unable to pay its $105,000 account payable to Big Corp. when it felt due on Sep. 30, 2014. Big agreed to substitute a one year note for the account. The following two opinions were presented to Little by Big Corp. Option 1. A one year note for $105,000 due Sep.30,2015. Interest at a rate of 8% would be payable at maturity. Option 2: A one year non interest bearing note for $113,400. The implied rate of interest is 8% .Assume that Big Corp. has a December 31 year end. a) assuming Little Corp. choose option 1, prepare the entries required on Big Corp.'s books on Sep. 30,2014, Dec.31, 2014, and sep. 30, 2015. b) Assuming Little Corp, choose Option 2, prepare the entries required on Big Corp.'s books on Sep. 31 2014, Dec.31, 2014, and September 30, 2015. c) Compare the amount of interest income eared by Big Corp. in 2014 and 2015 under both options. Comment briefly. d) From management prespective, does one option provide better liquidity for Big Corp.at Dec. 31, 2014? Does one option provide better cash flows than the other?
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