On February 1, 2016, borrowed $58,000 cash from the local bank. The note had a 5

Question

On February 1, 2016, borrowed $58,000 cash from the local bank. The note had a 5 percent interest rate and was due on June 1, 2016.

Ripley provides a 90-day warranty on the merchandise sold. The warranty expense is estimated to be 2 percent of sales.

On November 1, 2016, borrowed $36,000 cash from the local bank. The note had a 7 percent interest rate and a one-year term to maturity.

A customer has filed a lawsuit against Ripley for $90,000 for breach of contract. The company attorney does not believe the suit has merit.

Answer the following questions:

What amount of cash did Ripley pay for interest during 2016? (Round your answer nearest dollar amount.)

What amount of interest expense is reported on Ripley’s income statement for 2016? (Round your answer nearest dollar amount.)

Post the liabilities transactions to T-accounts and prepare the current liabilities section of the balance sheet at December 31, 2016. (Round your answers nearest dollar amount.)

Show the effect of these transactions on the financial statements using a horizontal statements model like the one shown here. Use + for increase, ? for decrease, and NA for not affected. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA) or not affected (NA). The first transaction has been recorded as an example.

Explanation / Answer

Answer a-1. Interest Expense paid in 2016 = $58,000 X 5% X 4/12 Interest Expense paid in 2016 = $966.67 or say $967 (approx.) Answer a-2. Interest Expense Reported in Income Statement: Interest Expense on Note 1 - $58,000 X 5% X 4/12 967 Interest Expense on Note 2 - $36,000 X 7% X 2/12 420 Total Interest Expense 1387 Answer a-3. Warranty Expense - 2016 = $225,000 X 2%    4,500.00 Answer b & c. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Cash      58,000.00    Notes Payable      58,000.00 (To record the amount borrowed) 2 Cash    238,500.00    Sales    225,000.00    Sales Tax Payable      13,500.00 (to record the cash sales ) 3 Warranty Expense        4,500.00    Estimated Warranty Liability        4,500.00 (to record the warranty expense) 4 Sales Tax Payable      13,500.00    Cash      13,500.00 (To record the sales tax paid) 5 Notes Payable      58,000.00 Interest Expense            966.67    Cash      58,966.67 (To record the note paid) 6 Cash      36,000.00    Notes Payable      36,000.00 (To record the amount borrowed) 7 Estimated Warranty Liability        3,100.00    Cash        3,100.00 (To record the warranty repairs) 8 No Entry Required 9 Interest Expense            420.00    Interest Payable            420.00 (To record the interest exense on note) Notes Payable Interest Payable 5    58,000.00    58,000.00 1          420.00 9    36,000.00 6 End. Bal.    36,000.00 End. Bal.          420.00 Estimated Warranty Laibility Sales Tax Payable 7      3,100.00      4,500.00 3 4    13,500.00    13,500.00 2 End. Bal.      1,400.00 End. Bal.                   -   Balance Sheet (Partial) Current Liabilities Estimated warranty Liability      1,400.00 Notes Payable    36,000.00 Interest Payable          420.00 Total Current Liabilities    37,820.00 Answer c. Sr. No. Assets = Liabilities + Equity Revenue - Expenses = Net Income Cash Flow 1 Increase Increase Incerase Financing 2 Increase Increase Increase Increase Increase Incerase Operating 3 No Effect Increase Decrease Increase Decrease No Effect 4 Decrease Decrease Decrease Operating 5 Decrease Decrease Decrease Increase Decrease Decrease Opearting - Interest Decrease Financing - Note 6 Increase Increase Increase Financing 7 Decrease Decrease Decrease Operating 8 No Effect 9 No Effect Incerase Decrease Increase Decrease No Effect

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