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Interest on Note and Inventory Flows

On April 1, 2011, Hope Co. accepted a $5,000 face value note as evidence of a loan it made to Cannon Company. The note had a 12 percent interest rate and a on year-year term. What was the amount of interest revenue Hope recognized on the company's December 31, 2011 income statement?

The following data apply to the next three questions.

Units Price
Beginning Inventory 200 $1.20
First Purchase 400 $1.30
Second Purchase 250 $1.40

Sales 550 $2.00

1. Assuming a FIFO cost flow, what is the amount of gross margin reported on the income statement?

2. Assuming a LIFO cost flow, what is the amount of ending inventory reported on the balance sheet?

3. Assuming the a weighted average cost flow, the amount of ending inventory reported on the balance sheet would be (round the final answer to the nearest dollar)
a.$415.
b.$392.
c.$370.
d.$417.

Solution Preview

On April 1, 2011, Hope Co. accepted a $5,000 face value note as evidence of a loan it made to Cannon Company. The note had a 12 percent interest rate and a on year-year term. What was the amount of interest revenue Hope recognized on the company's December 31, 2011 income statement?

Interest revenue=principal*annual interest rate*(number of months in the year/12)
Interest revenue=$5,000 *.12 *(9/12)
Interest revenue=$450

1. Assuming a FIFO cost flow, what is the amount of gross margin reported on the income statement?

The first units purchased were the first units sold, so the gross margin will ...

Solution Summary

This solution illustrates how to compute accrued interest on a note and how to compute the gross margin under FIFO and the ending inventory value under LIFO and weighted average.

$2.19