The following selected transactions were taken from the books of Caledonia Company for 2011. 1. On March
Question:
The following selected transactions were taken from the books of Caledonia Company for 2011.
1. On March 1, 2011, borrowed \(\$ 50,000\) cash from the local bank. The note had a 6 percent interest rate and was due on September 1,2011.
2. Cash sales for the year amounted to \(\$ 225,000\) plus sales tax at the rate of 7 percent.
3. Caledonia provides a 90 -day warranty on the merchandise sold. The warranty expense is estimated to be 2 percent of sales.
4. Paid the sales tax to the state sales tax agency on \(\$ 190,000\) of the sales.
5. Paid the note due on September 1 and the related interest.
6. On October 1, 2011, borrowed \(\$ 40,000\) cash from the local bank. The note had a 7 percent interest rate and a one-year term to maturity.
7. Paid \(\$ 3,600\) in warranty repairs.
8. A customer has filed a lawsuit against Caledonia for \(\$ 100,000\) for breach of contract. The company attorney does not believe the suit has merit.
Required
a. Answer the following questions:
(1) What amount of cash did Caledonia pay for interest during the year?
(2) What amount of interest expense is reported on Caledonia's income statement for the year?
(3) What is the amount of warranty expense for the year?
b. Prepare the current liabilities section of the balance sheet at December 31, 2011. (Hint: first post the liabilities transactions to \(\mathrm{T}\)-accounts.)
c. Show the effect of these transactions on the financial statements using a horizontal statements model like the one shown here. Use a + to indicate increase, a - 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). The first transaction is recorded as an example.
Step by Step Answer:
AbsolutelyI can help you analyze the transactions for Caledonia Companyprepare general journal entriesand create financial statements for 2011 Analyzing Transactions and Effects on Financial Statements Horizontal Model Event Cash Notes Payable Equity Revenue Expenses Net Inc Cash Flow 1 Issue Discounted Note 50000 1200 50000 FA 2 Service Revenue 240750 240750 240750 OA 3 Warranty Expense 4815 4815 4815 OA 4 Sales Tax Payable 13350 13350 OA 5 Interest Expense 3000 50000 3000 3000 OA 53000 FA 6 Issue Discounted Note 40000 40000 FA 7 Warranty Repairs 3600 3600 3600 OA 3600 OA 8 Lawsuit Contingency Note 50000 Face Value x 6 Discount Rate 1200 Discount Amortization Sales Revenue 225000 x 1 7 Sales Tax 240750 Warranty Expense 240750 x 2 4815 Sales Tax Payable 225000 x 7 13350 General Journal Entries 2011 March 1 Cash 50000 Notes Payable 50000 Discount on Notes Payable 1200 To record issuance of discounted note April 30 estimated Warranty Expense 4815 Warranty Payable 4815 To record estimated warranty expense May when sales tax is paid Sales Tax Payable 13350 Cash 13350 To record sales tax payable September 1 Interest Expense 3000 Discount on Notes Payable 1200 Notes Payable 50000 Cash 53000 To record payment of note and interest October 1 Cash 40000 Notes Payable 40000 To record issuance of new note December 31 Warranty Payable 4815 To close estimated warranty expense Warranty Repairs 3600 Cash 3600 To record actual warranty repairs 2012 Assuming the lawsuit is not settled in 2011 no entry is required here unless the company decides to record a contingent liability Financial Statements 2011 Income Statement ...View the full answer
