On February 1, 2016, borrowed $46,000 cash from the local bank. The note had a 8

Question

On February 1, 2016, borrowed $46,000 cash from the local bank. The note had a 8 percent interest rate and was due on June 1, 2016.

Ripley provides a 90-day warranty on the merchandise sold. The warranty expense is estimated to be 2 percent of sales.

On November 1, 2016, borrowed $36,000 cash from the local bank. The note had a 10 percent interest rate and a one-year term to maturity.

A customer has filed a lawsuit against Ripley for $110,000 for breach of contract. The company attorney does not believe the suit has merit.

REQUIRED:

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

2.

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

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.)

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.

Explanation / Answer

1.

Duration of Loan = 4 months (01st Feb, 2016 to 1 June, 2016)

Interest included in amount paid on 1 June, 2016 = $46,000*8%*4/12 = $ 1,226.66 or $1,227 (approx.)

2.

Interest accrued on Loan on November 1, 2016 till 31st December, 2016 = $36,000*10%*2/12 = $600

Total interest expense is reported on Ripley’s income statement for 2016 = $1,227+$600 = $1,827

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