Question

The following selected transactions were taken from the books of Ripley Company for Year 1:

1. On February 1, Year 1, borrowed $45,000 cash from the local bank. The note had a 7 percent interest rate and was due on June 1, Year 1.
2. Cash sales for the year amounted to $235,000 plus sales tax at the rate of 8 percent.
3. Ripley provides a 90-day warranty on the merchandise sold. The warranty expense is estimated to be 4 percent of sales.
4. Paid the sales tax to the state sales tax agency on $205,000 of the sales.
5. Paid the note due on June 1 and the related interest.
6. On November 1, Year 1, borrowed $46,000 cash from the local bank. The note had a 8 percent interest rate and a one-year term to maturity.
7. Paid $3,200 in warranty repairs.
8. A customer has filed a lawsuit against Ripley for $11 million for breach of contract. The company attorney does not believe the suit has merit.

Required
a. Answer the following questions:
1. What amount of cash did Ripley pay for interest during Year 1?
2. What amount of interest expense is reported on Ripley’s income statement for Year 1?
3. What is the amount of warranty expense for Year 1?
b. Prepare the current liabilities section of the balance sheet at December 31, Year 1.
c. Show the effect of these transactions on the financial statements using a horizontal statements model like the one below. Use + for increase or − for decrease. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Columns for events that have no effect on any of the elements should be left blank. The first transaction has been recorded as an example.

Answer 1

1. Compute Amount of cash did Ripley pay for interest during Year 1:

Cash paid for interest [$45000 × 7% × 4/12]

$1,050

___________________________________________

2. Compute amount of interest expense is reported on Ripley’s income statement for Year 1:

Total Interest expense [$1050 + $613]	$1,663
$45000 × 7% × 4/12 = $1050
$46000 × 8% × 2/12 = $613

________________________________________

3. Compute the amount of warranty expense for Year 1:

Warranty expense [$235,000 × 4%]

$9,400

_______________________________________

b. Prepare the current liabilities section of the balance sheet at December 31, Year 1:

RIPLEY COMPANY
Balance Sheet (Partial)
As of December 31, Year 1
Current liabilities:
Warranty payable [$9400 - $3200]	$6,200
Interest payable	$613
Sales tax payable	$2,400
Notes payable [$45000 - $45000 + $46000]	$46,000
Total current liabilities	$55,213

Sales tax payable
[$235000 × 8%]	$18,800
[$205000 × 8%]	($16,400)
Balance	$2,400

Lawsuit filed is a contingent liability should not be recorded.

____________________________________________

C)