Boyd Company has a line of credit with State Bank. Boyd can borrow up to $400,000 at any time over the course of the 2016 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2016. Boyd agreed to pay interest at an annual rate equal to 2 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month.
The interest rate is applied to the outstanding monthly balance. For example, Boyd pays 7 percent (5 percent + 2 percent) annual interest on $100,000 for the month of January.
Boyd earned $45,000 of cash revenue during 2016.
a. Prepare an income statement, balance sheet, and statement of cash flows for 2016.
b. Write a memo to explain how the business was able to generate retained earnings when the owner contributed no assets to the business.