Required 1. Show the effects of each of the following transactions on the firms balance sheet: a. Borrowed $150,000,000 cash on June 1, 2001, and signed a nine-month note at an 8% annual interest rate. b. During 2001, sold goods during 2001 costing $8,000,000 for $18,000,000 cash. c. Paid warranty claims of $1,600,000 during 2001. d. Accrued interest on the note at December 31, 2001. 2. Discuss the meaning of the remaining warranty obligation. Discuss the un- derlying business reasons for offering warranties. What might the firm do if it expects warranty claims to continue at the same rate for another year? 3. What is the maturity date of the note? Assuming no additional interest has been accrued since December 31, 2001, what is the effect on the firms bal- ance sheet when the note is paid (including all the accrued interest)?

Transaction Analysis: Warranties and Interest 8-38 Set up the following accounts and balances at December 31, 2000, in an ac- counting equation: Cash $ 5,000,000 Inventory 10,000,000 Warranty obligation 2,250,000 Notes payable 0 Interest payable 0 Common stock 500,000 Retained earnings 12,250,000