Question

The following selected transactions were taken from the books of Ripley Company for 2016:

  

1.	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.
2.	Cash sales for the year amounted to $225,000 plus sales tax at the rate of 6 percent.
3.	Ripley provides a 90-day warranty on the merchandise sold. The warranty expense is estimated to be 2 percent of sales.
4.	Paid the sales tax to the state sales tax agency on $190,000 of the sales.
5.	Paid the note due on June 1 and the related interest.
6.	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.
7.	Paid $3,100 in warranty repairs.
8.	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.

Required

a.	Answer the following questions:

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

         

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

         

3.	What is the amount of warranty expense for 2016?

         

b.	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.)

         

         

c.	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.

         

Answer 1

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