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Chapter 18: Q18-22E (page 1038)

Cramer Corp. sells idle machinery to Enyart Company on July 1, 2017, for \(40,000. Cramer agrees to repurchase this equipment from Enyart on June 30, 2018, for a price of \)42,400 (an imputed interest rate of 6%).

Instructions

(a) Prepare the journal entry for Cramer for the transfer of the asset to Enyart on July 1, 2017.

(b) Prepare any other necessary journal entries for Cramer in 2017.

(c) Prepare the journal entry for Cramer when the machinery is repurchased on June 30, 2018.

Short Answer

Expert verified

Answer

Interest expense of the company is$1,200.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Journal Entries

In accounting, journal entries refer to the chronological recording of financial transactions of a business concern. Under such a process, transactions are presented in a tabular manner along with theexplanation of each accounting information.

02

Journal entry for transfer of asset

Date

Accounts and Explanation

Debit ($)

Credit ($)

2017

Jul 1

Cash

40,000

Liability to Enyart

40,000

(To record transfer of asset)

03

Preparation of additional journal entries for Cramer

Date

Accounts and Explanation

Debit ($)

Credit ($)

2017

Dec 31

Interest expense (40000*6%*6/12)

1,200

Liability to Enyart

1,200

(To record interest expense)

04

Journal entry for repurchase

Date

Accounts and Explanation

Debit ($)

Credit ($)

2018

Jun 30

Liability to Enyart

42,400

Cash

42,400

(To record the purchase of machine)

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Most popular questions from this chapter

(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.

Talarczyk Company sold 10,000 Super-Spreaders on December 31, 2017, at a total price of \(1,000,000, with a warranty guarantee that the product was free of any defects. The cost of the spreaders sold is \)550,000. The assurance warranties extend for a 2-year period and are estimated to cost \(40,000. Talarczyk also sold extended warranties (service-type warranties) related to 2,000 spreaders for 2 years beyond the 2-year period for \)12,000. Given this information, determine the amounts to report for the following at December 31, 2017: sales revenue, warranty expense, unearned warranty revenue, warranty liability, and cash.

(Gross Profit on Uncompleted Contract) On April 1, 2017, Dougherty Inc. entered into a cost plus fixed fee contract to construct an electric generator for Altom Corporation. At the contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of \(2,000,000. The fixed fee stipulated in the contract is \)450,000. Dougherty appropriately accounts for this contract under the percentage-of-completion method. During 2017, Dougherty incurred costs of \(800,000 related to the project. The estimated cost at December 31, 2017, to complete the contract is \)1,200,000. Altom was billed $600,000 under the contract.

Instructions

Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under the contract for the year ended December 31, 2017. Show supporting computations in good form.

(Allocate Transaction Price) Crankshaft Company manufactures equipment. Crankshaft鈥檚 products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from \(200,000 to \)1,500,000 and are quoted inclusive of installation. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Crankshaft has the following arrangement with Winkerbean Inc.

鈥� Winkerbean purchases equipment from Crankshaft for a price of \(1,000,000 and contracts with Crankshaft to install the equipment. Crankshaft charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Crankshaft determines installation service is estimated to have a standalone selling price of \)50,000. The cost of the equipment is \(600,000.

鈥� Winkerbean is obligated to pay Crankshaft the \)1,000,000 upon the delivery and installation of the equipment.

Crankshaft delivers the equipment on June 1, 2017, and completes the installation of the equipment on September 30, 2017. The equipment has a useful life of 10 years. Assume that the equipment and the installation are two distinct performance obligations which should be accounted for separately.

Instructions

(a) How should the transaction price of $1,000,000 be allocated among the service obligations?

(b) Prepare the journal entries for Crankshaft for this revenue arrangement on June 1, 2017 and September 30, 2017, assuming Crankshaft receives payment when installation is completed.

Destin Company signs a contract to manufacture a new 3D printer for \(80,000. The contract includes installation which costs \)4,000 and a maintenance agreement over the life of the printer at a cost of $10,000. The printer cannot be operated without the installation. Destin Company as well as other companies could provide the installation and maintenance agreement. What are Destin Company鈥檚 performance obligations in this contract?
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