Kemp Company has a line of credit with State Bank. Kemp can borrow up to $300,000 at any time over the course of the 2013 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2013. Kemp 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, Kemp pays 7 percent (5 percent 1 2 percent) annual interest on $120,000 for the month of January.

Kemp earned $40,000 of cash revenue during 2013.

Required
a. Prepare an income statement, balance sheet, and statement of cash flows for 2013.
b. Write a memo to explain how the business was able to generate retained earnings when the owner contributed no assets to thebusiness.

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Amount Borrowed or (Repaid) Prime Rate for the Month Month $120,000 50,000 (40,000) No change (80,000) (20,000) 5% January February March April through October November December No change