RIPLEY COMPANY Horizontal Statements Model Balance Sheet Stockholders' Liabilities Equity Event Assets 1. Increase = Increase 2. 3. 4. 5a. 5b. 6. 7. 8. Revenue Income Statement Statement of Cash Flows Expenses Net Income < Required B Required C Increase FA RIPLEY COMPANY Balance Sheet (Partial) As of December 31, Year 1 Current liabilities Total current liabilities
The following selected transactions were taken from the books of Ripley Company for Year 1:
- On February 1, Year 1, borrowed $56,000 cash from the local bank. The note had a 6 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 2 percent of sales.
- Paid the sales tax to the state sales tax agency on $190,000 of the sales.
- Paid the note due on June 1 and the related interest. Record payment of interest as transaction 5a and the repayment of the principal note as transaction 5b.
- On November 1, Year 1, borrowed $40,000 cash from the local bank. The note had a 7 percent interest rate and a one-year term to maturity.
- Paid $3,400 in warranty repairs.
- A customer has filed a lawsuit against Ripley for $13 million for breach of contract. The company attorney does not believe the suit has merit.
Required
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a. Answer the following questions:
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1. What amount of cash did Ripley pay for interest during Year 1?
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2. What amount of interest expense is reported on Ripley’s income statement for Year 1?
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3. What is the amount of warranty expense for Year 1?
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b. Prepare the current liabilities section of the balance sheet at December 31, Year 1.
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c. Show the effect of these transactions on the financial statements using a horizontal statements model. Indicate whether the event increases, decreases, or increases and decreases each element of the financial statements. In the Statement of Cash Flows column, designate the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first transaction has been recorded as an example.
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