Fay, Inc. finances its capital needs approximately one-third from long-term debt and two-thirds from equity. At December

Question:

Fay, Inc. finances its capital needs approximately one-third from long-term debt and two-thirds from equity. At December 31, 2006, Fay had the following liability and equity account balances:

11% debenture bonds payable, face amount $5,000,000

Additional paid-in capital $2,295,000

Premium on bonds payable 352,400

Retained earnings 2,465,000

Common stock 8,000,000

Treasury stock, at cost 325,000

Transactions during 2007 and other information relating to Fay’s liabilities and equity accounts were as follows:

1. The debenture bonds were issued on December 31, 2004 for $5,378,000 to yield 10%. The bonds mature on December 31, 2019. Interest is payable annually on December 31. Fay uses the interest method to amortize bond premium.

2. Fay’s common stock shares are traded on the over-the-counter market. At December 31, 2006, Fay had 2,000,000 authorized shares of $10 par common stock.

3. On January 16, 2007, Fay reissued 15,000 of its 25,000 shares of treasury stock for $225,000. The treasury stock had been acquired on February 24, 2006.

4. On March 2, 2007, Fay issued a 5% stock dividend on all issued shares. The market price of Fay’s common stock at the time of issuance was $14 per share.

5. On November 2, 2007, Fay borrowed $4,000,000 at 9%, evidenced by an unsecured note payable to United Bank. The note is payable in five equal annual principal installments of $800,000. The first principal and interest payment is due on November 2, 2008.

6. On December 31, 2007, Fay owned 10,000 shares of Ryan Corp.’s common stock, which represented a 1% ownership interest. Fay treats this marketable equity investment as a long-term investment in available-for-sale securities. The stock was purchased on November 2, 2007 at $20 per share. The market price was $18 per share on December 31, 2007.

7. Fay’s net income for 2007 was $2,860,000.

Required

1. Prepare the long-term liabilities section of Fay’s December 31, 2007 balance sheet, including all disclosures applicable to each obligation.

2. Prepare the stockholders’ equity section of Fay’s December 31, 2007 balance sheet.

3. Prepare a schedule showing interest expense for the year ended December 31, 2007.

Common Stock
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