Question

The following selected transactions were taken from the books of Ripley Company for 2018:
1.   On February 1, 2018, borrowed $70,000 cash from the local bank. The note had a 6 percent interest rate and was due on June 1, 2018.
2.   Cash sales for the year amounted to $240,000 plus sales tax at the rate of 7 percent.

3.   Ripley provides a 90-day warranty on the merchandise sold. The warranty expense is estimated to be 1 percent of sales.
4.   Paid the sales tax to the state sales tax agency on $210,000 of the sales.

5.   Paid the note due on June 1 and the related interest.

6.   On November 1, 2018, borrowed $20,000 cash from the local bank. The note had a 6 percent in-
terest rate and a one-year term to maturity.

7.   Paid $2,100 in warranty repairs.

8.   A customer has filed a lawsuit against Ripley for $1 million for breach of contract. The company
attorney does not believe the suit has merit.
Required
a.   Answer the following questions:
(1) (2) (3)
What amount of cash did Ripley pay for interest during 2018?

What amount of interest expense is reported on Ripley’s income statement for 2018?

What is the amount of warranty expense for 2018?

b.   Prepare the current liabilities section of the balance sheet at December 31, 2018.

c. Show the effect of these transactions on the financial statements using a horizontal statements model like the one below. 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).

a. (1)     Cash paid for interest:       $. x % x /12 =

     (2)     Interest Expense:    $            x   % x  /12 =     $

                                               $            x   % x  /12 =                    

                                               Total Interest Expense   $

     

     (3)     Warranty Expense:  $                 x    % = $

b.

Interest Payable		Sales Tax Payable
6.1		2.2                                                                    4.3
Bal.		Bal.

¹$         x    % x    /12 = $                                       ²$              x     % = $

                                                                                   ³$              x      % = $

Warranty Payable		Notes Payable
3.4		1.
7.		5.
Bal.		6.
		Bal.

⁴$             x % = $

                                                                                   

Ripley Company
	Current Liabilities
		$
	Total Current Liabilities	$

Note:  Is there anything that should not be recorded and why?

Answer 1

Answer;

(a)

(1). Cash Paid For Interest = $70000*(6/100)*(4/12) = $1400

Explanation

Feb-1 to Jun-1 = 4 Months

Interest = 6%

JUNE 1 ( Interest Paid)

Interest = $70000*(6/100)*(4/12) = $1400

(2).Interest Expense ;

   $70000*(6/100)*(4/12) = $1400 (Paid See Above Explanation)

$20000*(6/12)*(2/12) = $200

Explanation ;

Nov-18 to Dec-18 (Interest Accrued for Year ending Dec-18) = 2 Months

Interest = 6%

Interest (Accrued) = $20000*(6/12)*(2/12) = $200

Total Interest Expense = $1400(Paid in Cash) + $200 (Accrued) =( $1400 + $200) = $1600

(3) Warranty Expense = $ 240000 * 1% = $2400

Even though the company paid $2100 for warranty Repairs ,it has to be record the warranty Expenses in Income Statement for the Year ending DEC-18 is $2400 .Because it has Warranty Period of 90 days has not been expired at the year ending.The warranty Liability in subsequent periods are adjusted with Inventories in Balance Sheet.

(b) Current Liabilities Section  of the balance sheet at December 31, 2018

Sr No	Current Liabilities	Amount($)
1.	Sales Tax Payable	2100
2.	6% Notes Payable	20000
3.	Interest accrued on 6% Notes Payable	200
4.	warranty Payable	300
	Total Current Liabilities	22600

Explanation

1.Sales Tax Payable

Sales Tax Liability = Sales * Sales Tax = $240000 * 7% = $16800

Sales Tax Paid = $ 14700

Sales Tax Payable = $16800 - $14700 = $2100

3. Calculated Above

4.Warranty Payable

warranty Liability = $ 2400

Warranty Liability Paid = $2100

Warranty Payable = $2400 - $2100 = $300

A customer has filed a lawsuit against Ripley for $1 million for breach of contract. The company
attorney does not believe the suit has merit is a Contingent Liability because it is not probable to be happen.so, it has to be shown in foot note under Notes to Balance Sheet

(c) Show the effect of these transactions on the financial statements using a horizontal statements model ;

Interest Payable		Sales Tax Payable
6.)20000*6/100*2/12=$200		(2.3) +16800 4.3) -14700
$200		$2100

Warranty Payable		Notes Payable
3.4)+2400 7)-2100		1+.$70000 5.-70000 6.+20000
$300		$20000

warranty Payable = Operating Activity

Notes Payable & Interest Payable = financing Activity

Sales Tax Liability = Operating Activity

THANK YOU!