On March 1, 2014, borrowed $48,000 cash from the local bank. The note had a 8 pe

Question

On March 1, 2014, borrowed $48,000 cash from the local bank. The note had a 8 percent interest rate and was due on September 1, 2014.

Aliceville provides a 90-day warranty on the merchandise sold. The warranty expense is estimated to be 4 percent of sales.

On October 1, 2014, borrowed $45,000 cash from the local bank. The note had a 8 percent interest rate and a one-year term to maturity.

A customer has filed a lawsuit against Aliceville for $80,000 for breach of contract. The company attorney does not believe the suit has merit.

1.)What amount of cash did Aliceville pay for interest during the year? (Do not round intermediate calculation.)

2.) What amount of interest expense is reported on Aliceville’s income statement for the year? (Do not round intermediate calculations and round your final answer to nearest whole dollar amount.)

3.) What is the amount of warranty expense for the year?

Explanation / Answer

1. Amount of

cash did Alicevelle pay for interest= $4,620

($48000 × 8% × 6months= $1,920

$45000 × 8% × 9months= $2,700)

2. Amount of interest expense on Alicevelle income statement for the year=

2.1. $48000 × 8% × 6 mnths= $1,920

2.2($45,000×(1+8%/12))^(12×1))-$45,000

($45,000×(1+.67)^12)-$45,000

($45,000×2.129)-$45,000= $5,040

$1,920 + $5,040= $6,960.

3. The amount of warrantyexpense for the year=

(90days/365days)×$2,30,000×4%= $2,263.2

Add- repairs= $3,100

Total= $5,363.2

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