Question
In: Accounting
The following selected transactions were taken from the books of Ripley Company for Year 1: On...
The following selected transactions were taken from the books of
Ripley Company for Year 1:
- On February 1, Year 1, borrowed $50,000 cash from the local bank. The note had a 8 percent interest rate and was due on June 1, Year 1.
- Cash sales for the year amounted to $235,000 plus sales tax at the rate of 7 percent.
- Ripley provides a 90-day warranty on the merchandise sold. The warranty expense is estimated to be 3 percent of sales.
- Paid the sales tax to the state sales tax agency on $195,000 of the sales.
- Paid the note due on June 1 and the related interest.
- On November 1, Year 1, borrowed $44,000 cash from the local bank. The note had a 7 percent interest rate and a one-year term to maturity.
- Paid $3,200 in warranty repairs.
- A customer has filed a lawsuit against Ripley for $80,000 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 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.
Solutions
Expert Solution
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.
ekkarill92 answered 1 year agoRelated Solutions
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