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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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