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.

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

                                                                                   ³$              x      % = $

⁴$             x % = $

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

On January 1, 2018, Labtech Circuits borrowed $190,000 from First Bank by issuing a three-year, 8% note, payable on December 31, 2020. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2018, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 8% fixed interest rate on a notional amount of $190,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year. Floating (LIBOR) settlement rates were 8% at inception and 9%, 7%, and 7% at the end of 2018, 2019, and 2020, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. These quotes and the fair values of the note are as follows: January 1 December 31 2018 2018 2019 2020 Fair value of interest rate swap 0 $ (2,659 ) $ 1,835 $ 0 Fair value of note payable $ 190,000 $ 187,341 $ 191,835 $ 190,000 Required: 1. Calculate the net cash settlement at the end of 2018, 2019, and 2020. 2. Prepare the journal entries during 2018 to record the issuance of the note, interest, and necessary adjustments for changes in fair value. 3. Prepare the journal entries during 2019 to record interest, net cash interest settlement for the interest rate swap, and necessary adjustments for changes in fair value. 4. Prepare the journal entries during 2020 to record interest, net cash interest settlement for the interest rate swap, necessary adjustments for changes in fair value, and repayment of the debt. 5. Calculate the book values of both the swap account and the note in each of the three years. 6. Calculate the net effect on earnings of the hedging arrangement in each of the three years. (Ignore income taxes.) 7. Suppose the fair value of the note at December 31, 2018, had been $187,000 rather than $187,341 with the additional decline in fair value due to investors’ perceptions that the credit worthiness of Labtech was worsening. How would that affect your entries to record changes in the fair values?

Drs. Glenn Feltham and David Ambrose began operations of their physical therapy clinic, called Northland Physical Therapy, on January 1, 2017. The annual reporting period ends December 31. The trial balance on January 1, 2018, was as follows (the amounts are rounded to thousands of dollars to simplify):

Transactions during 2018 (summarized in thousands of dollars) follow:

1. Borrowed $27 cash on July 1, 2018, signing a six-month note payable.
2. Purchased equipment for $30 cash on July 2, 2018.
3. Issued additional shares of common stock for $4 on July 3.
4. Purchased software on July 4, $4 cash.
5. Purchased supplies on July 5 on account for future use, $6.
6. Recorded revenues on December 6 of $62, including $10 on credit and $52 received in cash.
7. Recognized salaries and wages expense on December 7 of $35; paid in cash.
8. Collected accounts receivable on December 8, $7.
9. Paid accounts payable on December 9, $8.
10. Received a $4 cash deposit on December 10 from a hospital for a contract to start January 5, 2019.

Data for adjusting journal entries on December 31:

11. Amortization for 2018, $1.
12. Supplies of $4 were counted on December 31, 2018.
13. Depreciation for 2018, $2.
14. Accrued interest of $1 on notes payable.
15. Salaries and wages incurred but not yet paid or recorded, $2.
16. Income tax expense for 2018 was $5 and will be paid in 2019.

8. Post the closing entry from requirement 7 and prepare a post-closing trial balance.

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