short answer problem about basic accounting

THE BANK LOAN CASE So, what do I owe? Business at Eddie Fender's Body Shop is brisk. The shop is filled with auto- mobiles damaged in fender-bender accidents on streets and highways glazed in a recent ice storm. Many of the cars to be repaired are expensive imports for which Fender must order parts from abroad. Although the owners of those cars are insured, Fender cannot collect for parts and labor until the repairs are complete and claims checks are released by the insurance carriers. Because Fender must prepay for the parts orders, he must take out a short-term loan to provide the needed working capital to repair the cars. Fender obtained a $120,000 bank loan on October 1 in the name of his busi- ness. The face interest rate is 6.5 percent per annum, and both interest and principal are due in a single payment 12 months hence. The loan contract contains several important provisions. One is that the loan is not assumable by any other party: should Fender die, sell his business, or otherwise lose control of it, both principal and interest accrued to date be- come payable on demand. Another entitles Fender to pay off the loan at any time simply by repaying the principal and interest accrued to date: the con- tract states that the bank earns interest based on the "rule of 78s method." Early in December, Fender learned that he would be receiving an unexpect- edly large inheritance from his uncle. The executor of the estate notified him that his bequest of nearly $150,000 would be paid in cash on January 1. Hav- ing no other pressing needs for the funds, Fender is contemplating investing them in his business to wipe out the bank loan. The body shop's books are maintained on a calendar-year basis. Interest rates for notes of similar terms and quality as Fender's have remained unchanged through the end of the current year. a. How should Eddie Fender's Body Shop report the loan on its year-end fi- nancial statements? Should Fender's intent to repay or not repay the loan early affect the accounting? b. Assume Fender had to pay one point as a nonrefundable loan inception fee, which Mark Deutsche, the loan officer, explained as necessary to cover the costs of the credit check and other paperwork relative to the loan. How should the fee be reported on the year-end statements? THE BANK LOAN CASE So, what do I owe? Business at Eddie Fender's Body Shop is brisk. The shop is filled with auto- mobiles damaged in fender-bender accidents on streets and highways glazed in a recent ice storm. Many of the cars to be repaired are expensive imports for which Fender must order parts from abroad. Although the owners of those cars are insured, Fender cannot collect for parts and labor until the repairs are complete and claims checks are released by the insurance carriers. Because Fender must prepay for the parts orders, he must take out a short-term loan to provide the needed working capital to repair the cars. Fender obtained a $120,000 bank loan on October 1 in the name of his busi- ness. The face interest rate is 6.5 percent per annum, and both interest and principal are due in a single payment 12 months hence. The loan contract contains several important provisions. One is that the loan is not assumable by any other party: should Fender die, sell his business, or otherwise lose control of it, both principal and interest accrued to date be- come payable on demand. Another entitles Fender to pay off the loan at any time simply by repaying the principal and interest accrued to date: the con- tract states that the bank earns interest based on the "rule of 78s method." Early in December, Fender learned that he would be receiving an unexpect- edly large inheritance from his uncle. The executor of the estate notified him that his bequest of nearly $150,000 would be paid in cash on January 1. Hav- ing no other pressing needs for the funds, Fender is contemplating investing them in his business to wipe out the bank loan. The body shop's books are maintained on a calendar-year basis. Interest rates for notes of similar terms and quality as Fender's have remained unchanged through the end of the current year. a. How should Eddie Fender's Body Shop report the loan on its year-end fi- nancial statements? Should Fender's intent to repay or not repay the loan early affect the accounting? b. Assume Fender had to pay one point as a nonrefundable loan inception fee, which Mark Deutsche, the loan officer, explained as necessary to cover the costs of the credit check and other paperwork relative to the loan. How should the fee be reported on the year-end statements