The following selected transactions were taken from the books of Caledonia Compa
ID: 2351575 • Letter: T
Question
The following selected transactions were taken from the books of Caledonia Company for 2008.1.On March 1, 2008, borrowed $50,000 cash from the local bank. The note had a 6 percent interest rate and was due on September 1, 2008.
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, 2008, 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
1.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
Explanation / Answer
1.Answer the following questions: 1.What amount of cash did Caledonia pay for interest during the year?
50000*.06/12*6 = 1500
2.What amount of interest expense is reported on Caledonia’s income statement for the year? 1500 + 700 (40000*.07/12*3) = 2200
3.What is the amount of warranty expense for the year?
Sales X warranty percentage: 225000 * .02 = 4500
2.Prepare the current liabilities section of the balance sheet at December 31, 2008. (Hint: first post the liabilities transactions to T-accounts.)
Current liabilities:
Sales tax payable 24501
Interest payable 700
Notes payable 40000
Provision for warranties 9002
Note 1: (225000-190000)*.07 = 2450
Note 2: 4500-3600 = 900