Chapter 7, Problem 28P

a (1).

To determine

Calculate amount of cash that Company A pay for interest during 2014.

Explanation of Solution

Calculate the amount of cash did Company A pay for interest during 2014.

On March 1, 2014, Company A borrowed $60,000 cash from bank at 6% interest rate and due on September 1, 2014.

$\begin{array}{c}\text{Cash paid for interest = \$60,000}\times \text{6\%}\times \frac{6\text{months}}{12\text{months}}\\ =\$1,800\end{array}$

Hence, cash paid for interest expense during 2014 is $1,800.

a (2).

To determine

Calculate the amount of interest expense is reported on Company A’s income statement for 2014.

Explanation of Solution

Interest expense: Interest expense is an expense account, and it decreases the value of net income. Hence, interest expense appears in the income statement.

Calculate the Amount of interest expense is reported on Company A’s income statement for 2014.

On March 1, 2014, Company A borrowed $60,000 cash from bank at 6% interest rate and due on September 1, 2014. On October 1, 2014, Company A borrowed $50,000 cash from bank at 7% interest rate and a one-year term to maturity.

Interest expense on $70,000 borrowings $\left(\$60,000\times 6\%\times \left[6÷12\right]\right)$	$1,800
Interest expense om$20,000 borrowings   $\left(\$50,000\times 7\%\times \left[3÷12\right]\right)$	$875
Total interest expense amount	$2,675

Table (1)

Hence, the amount of interest expense is reported on Company A’s income statement for 2014 is $2,675.

a (3).

To determine

Calculate the amount of warranty expense for 2014.

Explanation of Solution

Calculate the amount of warranty expense for 2014.

Company A provides a 90-days warranty on the merchandise sold. The estimated warranty expense is to be 2% of sales. Total sales are $240,000.

$\begin{array}{c}\text{Warranty expesne = \$240,000}\times 2\text{\%}\\ \text{=}\text{\$4,800}\end{array}$

Hence, the amount of warranty expense for 2014 is $4,800.

b.

To determine

Prepare the current liabilities section of the balance sheet at December 31, 2014.

Answer to Problem 28P

Current liabilities: The debts obligations owed by a company to creditors and suppliers and are to be paid within a year are referred to as current liabilities.

Prepare the current liabilities section of the balance sheet at December 31, 2014.

Company A
Balance sheet (partial)
As on December 31, 2014
Current Liabilities:
Interest Payable (1)	$875
Sales Tax Payable (2)	2,800
Warranty Payable (3)	1,000
Notes Payable (4)	50,000
Total Current Liabilities	$54,675

Table (2)

Hence, total current liabilities as on December 31, 2014 are $54,675.

Explanation of Solution

Current liability: Current liability is an obligation that the companies need to pay from its current assets or creation of other current liabilities within a fiscal year or the operating cycle whichever is higher.

Working note 1: Prepare interest payable account:

Interest payable
		6. Refer table (1)	$875
		Ending Balance	$875

Working note 2: Prepare sales tax payable account:

Sales tax payable
4. $\left(\$200,000\times 7\%\right)$	$14,000	2. $\left(\$240,000\times 7\%\right)$	$16,800
		Ending Balance	2,800

Working note 3: Prepare warranty payable account:

Warranty payable
7.	$3,800	3. $\left(\$240,000\times 1\%\right)$	$4,800
		Ending Balance	1,000

Working note 4: Prepare Note payable account:

Notes payable
		1.	60,000
5.	60,000	6.	50,000
		Ending Balance	50,000

Note: A customer filed a lawsuit against Company A for $150,000 for breach of contract. Company A’s attorney does not believe the suit has merit. Hence, it is deemed to be remote obligation (contingent liability). Remote obligations are not reported in the financial statements or disclosed in the notes to the statements.

c.

To determine

Show the effect of these transactions on the financial statements using a horizontal statements model. 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).

Explanation of Solution

Accounting equation:  Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below.

$\text{Assets = Liabilities + Stockholders' Equity}$

Show the effect of these transactions on the financial statements using a horizontal statements model.

Table (3)