Question

On May 1, Year 1, Benz’s Sandwich Shop loaned $16,000 to Mark Henry for one year at 8 percent interest. Required a. What is Benz’s interest income for Year 1?b. What is Benz’s total amount of receivables at December 31, Year 1?c. How will the loan and interest be reported on Benz’s Year 1 statement of cash flows?d. What is Benz’s interest income for Year 2?e. What is the total amount of cash that Benz’s will collect in Year 2 from Mark Henry?f. How will the loan and interest be reported on Benz’s Year 2 statement of cash flows?g. What is the total amount of interest that Benz’s earned on the loan to Mark Henry? (For all requirements, round your answers to the nearest dollar amount.)

Answer 1

Explanation:

The computations are shown below:

a. Interest income for the year 1

= $16,000 × 8% × 8 months ÷ 12 months

= $853

b. Total amount of receivable

= Loan amount + interest income

= $16,000 + $853

= $16,853

c. The loan amount would be reported under the investing activities as a negative sign i.e $16,000 and the interest income is not shown anywhere in the cash flow statement

d.  Interest income for the year 2

= $16,000 × 8% × 4 months ÷ 12 months

= $427

e. Total amount of cash collection in the year 2

= Loan amount + interest income for year 1 + interest income for year 2

= $16,000 + $853 + $427

= $17,280

f. The loan amount would be reported under the investing activities as a positive sign i.e $16,000 and the cash collection i.e $17,280 is shown under the cash flow provided by operating activities

g. Total amount of interest earned is

= $427 + $853

= $1,280