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Chapter 18: 23E (page 1038)

Zagat Inc. enters into an agreement on March 1, 2017, to sell Werner Metal Company aluminum ingots. As part of the agreement, Zagat also agrees to repurchase the ingots on May 1, 2017, at the original sales price of $200,000 plus 2%.

Instructions

(a) Prepare Zagat鈥檚 journal entry necessary on March 1, 2017.

(b) Prepare Zagat鈥檚 journal entry for the repurchase of the ingots on May 1, 2017.

Short Answer

Expert verified

The cash received is $204,000.

Step by step solution

01

Meaning of Repurchase Agreement

Arepurchase agreement is a type of short-term financing for government dealers. Repo occurs when a dealer sells government assets to investors overnight and then purchases the assets back the next day at a slightly higher price.

02

Journal entries for Zagat Inc.

Date

Particular

Debit ($)

Credit ($)

March 1, 2017

Cash a/c

200,000

Werner metal company a/c

200,000

May 1, 2017

Interest expense a/c

4,000

Werner metal company a/c

200,000

Cash a/c

204,000

Working Notes:

Interestexpense=Salesprice脳Interestexpense=$200,000脳2%=$4,000

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Most popular questions from this chapter

(Sales with Returns) On March 10, 2017, Steele Company sold to Barr Hardware 200 tool sets at a price of \(50 each (cost \)30 per set) with terms of n/60, f.o.b. shipping point. Steele allows Barr to return any unused tool sets within 60 days of purchase. Steele estimates that (1) 10 sets will be returned, (2) the cost of recovering the products will be immaterial, and (3) the returned tools sets can be resold at a profit. On March 25, 2017, Barr returned six tool sets and received a credit to its account.

Instructions

(a) Prepare journal entries for Steele to record (1) the sale on March 10, 2017, (2) the return on March 25, 2017, and (c) any adjusting entries required on March 31, 2017 (when Steele prepares financial statements). Steele believes the original estimate of returns is correct.

(b) Indicate the income statement and balance sheet reporting by Steele at March 31, 2017, of the information related to the Barr sales transaction.

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 鈥�0鈥�

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.

(b) Prepare all necessary journal entries for 2018.

(c) Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used.

P18-4 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Economy Appliance Co. manufactures low-price, no-frills appliances that are in great demand for rental units. Pricing and cost information on Economy鈥檚 main products are as follows

Item

Standalone Selling price (cost)

Refrigerator

\(500 (\)260)

Range

560 (275)

Stackable washer/dryer unit

700 (400)

Customers can contract to purchase either individually at the stated prices or a three-item bundle with a price of \(1,800. The bundle price includes delivery and installation. The economy also provides installation (not a separate performance obligation).

Instructions

Respond to the requirements related to the following independent revenue arrangements for Economy Appliance Co.

On June 1, 2017, Economy sold 100 washer/dryer units without installation to Laplante Rentals for \)70,000. Laplante is a newer customer and is unsure how this product will work in its older rental units. Economy offers a 60-day return privilege and estimates, based on prior experience with sales on this product, that 4% of the units will be returned. Prepare the journal entries for the sale and related cost of goods sold on June 1, 2017.

What are the two types of losses that can become evident in accounting for long-term contracts? What is the nature of each type of loss? How is each type accounted for?

(Franchise Fee, Initial Down Payment) On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Campbell Inc. for an initial franchise fee of \(50,000. The amount of \)10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $8,000 each, beginning January 1, 2018. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2017. Lesley Benjamin鈥檚 credit rating indicates that she can borrow money at 11% for a loan of this type.

Instructions

(c) Repeat the requirements for part (a), assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.
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