In: Accounting
The following selected transactions were taken from the books of
Ripley Company for Year 1:
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. Post the liabilities transactions to T-accounts
and 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 shown next. 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.
a.
1. Cash paid for interest = $50000 x 8% x 4/12 = $1333.33
2. Interest expense = $1333.33 + ($44000 x 7% x 2/12) = $1333.33 + $513.33 = $1846.66
3. Warranty expense = 3% x $235000 = $7050
Kindly round off as required since no instructions have been provided with the question regarding the same.
b.
Interest Payable | Sales Tax Payable | |||||||
513 | 6 | 16450 | 2 | |||||
Bal. | 513 | 4 | 13650 | |||||
Bal. | 2800 | |||||||
$44000 x 7% x 2/12 = $513 | $235000 x 7% = $16450 | |||||||
$195000 x 7% = $13650 | ||||||||
Warranty Payable | Notes Payable | |||||||
7050 | 3 | 50000 | 1 | |||||
7 | 3200 | 5 | 50000 | |||||
Bal. | 3850 | 44000 | 6 | |||||
$235000 x 3% = $7050 | Bal. | 44000 |
RIPLEY COMPANY | |
Balance Sheet (Partial) | |
As of December 31, Year 1 | |
Current liabilities: | |
Warranty payable | 3850 |
Interest payable | 513 |
Sales tax payable | 2800 |
Notes payable | 44000 |
Total current liabilities | 51163 |
c.
RIPLEY COMPANY | ||||||||||||
Horizontal Statements Model | ||||||||||||
Event | Assets | = | Liabilities | + | Equity | Revenue | - | Expense | = | Net Income | Cash Flow | |
1 | + | = | + | + | NA | NA | - | NA | = | NA | + | FA |
2 | + | = | + | + | + | + | - | NA | = | + | + | OA |
3 | NA | = | + | + | - | NA | - | + | = | - | NA | |
4 | - | = | - | + | NA | NA | - | NA | = | NA | - | OA |
5a. | - | = | - | + | NA | NA | - | NA | = | NA | - | FA |
5b. | - | = | NA | + | - | NA | - | + | = | - | - | OA |
6 | + | = | + | + | NA | NA | - | NA | = | NA | + | FA |
7 | - | = | - | + | NA | NA | - | NA | = | NA | - | OA |
8 | NA | = | NA | + | NA | NA | - | NA | = | NA | NA |
Note: 5a. is for the payment of the note and 5b. is for the payment of the related interest.
The lawsuit filed against Ripley by a customer for $80,000 for breach of contract should not be recorded since it is a contingent liability with probability of its occurrence being remote as the attorney believes the suit does not have merit.