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Chapter 18: 10BE (page 1033)

On March 1, 2017, Parnevik Company sold goods to Goosen Inc. for \(660,000 in exchange for a 5-year, zerointerest-bearing note in the face amount of \)1,062,937 (an inputed rate of 10%). The goods have an inventory cost on Parnevik’s books of $400,000. Prepare the journal entries for Parnevik on (a) March 1, 2017, and (b) December 31, 2017.

Short Answer

Expert verified

Interest for 10 months is $ 55,000

Step by step solution

01

Meaning of Inventory Cost

Inventory costs include all costs connected with an order, keeping, and maintaining a product-based business's inventory or stock levels. Carrying costs, ordering costs, and stockout costs are three types of inventory expenses that are typically split down.

02

Journal entries

Date

Particulars

Debit ($)

Credit ($)

March 1, 2017

Note receivables a/c Dr.

1,062,937

To Sales revenue a/c

660,000

To Premium on note receivables a/c

402,937

March 1, 2017

Cost of goods sold a/c Dr.

400,000

To Inventory a/c

400,000

December 31, 2017

Premium on note receivable a/c Dr.

55,000

To Interest a/c

55,000

Working Note:

Sales Revenue = $660,000

Inputted Rate = 10%

Time Period = 10 months

Interestfor10months=Salesrevenue×Inputedrate×Timeperiod=$660,000×10100×1012=$55,000

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Most popular questions from this chapter

What is the nature of a sale on consignment?

In September 2017, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for \(15,000 (\)100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional \(4,275 (\)95 per station). All sales are cash on delivery.

Instructions

(a) Prepare the journal entry for Gaertner for the sale of the first 90 stations. The cost of each station is $54.

(b) Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately.

(c) Prepare the journal entry for the sale of 10 more stations (as in (b)), assuming that the pricing for the additional products does not reflect the standalone selling price of the additional products and the prospective method is used.

(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 –0–

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.

(Contract Costs) Rex’s Reclaimers entered into a contract with Dan’s Demolition to manage the processing of recycled materials on Dan’s various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Rex’s incurs selling commission costs of \(2,000 to obtain the contract. Before performing the services, Rex’s also designs and builds receptacles and loading equipment that interfaces with Dan’s demolition equipment at a cost of \)27,000. These receptacles and equipment are retained by Rex’s and can be used for other projects. Dan’s promises to pay a fixed fee of \(12,000 per year, payable every 6 months for the services under the contract. Rex’s incurs the following costs: design services for the receptacles to interface with Dan’s equipment \)3,000, loading equipment controllers \(6,000, and special testing and OSHA inspection fees \)2,000 (some of Dan’s projects are on government property).

Instructions

(a) Determine the costs that should be capitalized as part of Rex’s Reclaimers revenue arrangement with Dan’s Demolition.

Travel Inc. sells tickets for a Caribbean cruise on ShipAway Cruise Lines to Carmel Company employees. The total cruise package price to Carmel Company employees is \(70,000. Travel Inc. receives a commission of 6% of the total price. Travel Inc. therefore remits \)65,800 to ShipAway. Prepare the journal entry to record the remittance and revenue recognized by Travel Inc. on this transaction.
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