Part A
The accountant for Lunn Express wants to develop a balance sheet as of December 31, 2014. The following items pertain to the Liability category and must be considered to determine the items that should be reported in the Current Liabilities section of the balance sheet. You may assume that Lunn began business on January 1, 2014; therefore, the beginning balance of all accounts was zero.
a. During 2014, Lunn purchased $100,000 of inventory on account from suppliers. By yearend, $40,000 of the balance had been eliminated as a result of payments. All items were purchased on terms of 2/10, n/30. Lunn uses the gross method of recording payables.
b. On April 1, 2014, Lunn borrowed $10,000 on a one-year note payable from Philips Bank. Terms of the loan indicate that Lunn must repay the principal and 12% interest at the due date of the note.
c. On October 1, 2014, Lunn also borrowed $8,000 from Dove Bank on a one-year note payable. Dove Bank deducted 10% interest in advance and gave to Lunn the net amount. At the due date, Lunn must repay the principal of $8,000.
d. On January 1, 2014, Lunn borrowed $20,000 from Owens Bank by signing a ten-year note payable. Terms of the note indicate that Lunn must make annual payments of principal each January 1 beginning in 2015 and must pay interest each January 1 in the amount of 8% of the outstanding balance of the loan.
e. The accountant for Lunn has completed an income statement for 2014 that indicates that income before taxes was $10,000. Lunn must pay tax at the rate of 40% and must remit the tax to the Internal Revenue Service by April 15, 2015.
f. As of December 31, 2014, Lunn owes its employees salaries of $3,000 for work performed in 2014. The employees will be paid on the first payday of 2015.
g. During 2014, two lawsuits were filed against Lunn. In the first lawsuit, a customer sued for damages because of an injury that occurred on Lunn’s premises. Lunn’s legal counsel advised that it is probable that the lawsuit will be settled in 2015 at an amount of $7,000. The second lawsuit involves a patent infringement suit of $14,000 filed against Lunn by a competitor. The legal counsel has advised that Lunn may be at fault but that a loss does not appear probable at this time.
Part B
a. What amount will be accumulated by January 1, 2018, if $5,000 is invested on January 1, 2014, at 10% interest compounded semiannually?
b. Assume that $5,000 is to be received on January 1, 2018. What amount at January 1, 2014, is equivalent to the $5,000 that is to be received in 2018? Assume that interest is compounded annually at 10%.
c. What amount will be accumulated by January 1, 2018, if $5,000 is invested each semiannual period for eight periods beginning June 30, 2014, and ending December 31, 2017? Interest will accumulate at 10% compounded semiannually.
d. Assume that $5,000 is to be received each semiannual period for eight periods beginning on June 30, 2014. What amount at January 1, 2018, is equivalent to the future series of payments? Assume that interest will accrue at 10% compounded semiannually.
e. Assume that a new bank has begun a promotional campaign to attract savings accounts. The bank advertisement indicates that customers who invest $1,000 will double their money in ten years. Assuming annual compounding of interest, what rate of interest is the bank offering?
Required
1. Consider all items in Part A. Develop the Current Liabilities section of Lunn’s balance sheet as of December 31, 2014. To make investment decisions about this company, what additional data would you need? You do not need to consider the notes that accompany the balance sheet.
2. Answer the five questions in Part B.