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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’s journal entry necessary on March 1, 2017.

(b) Prepare Zagat’s 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×Interestexpense=$200,000×2%=$4,000

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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 –0–

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

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

Instructions

(b) Prepare all necessary journal entries for 2018.

On June 3, 2017, Hunt Company sold to Ann Mount merchandise having a sales price of \(8,000 (cost \)6,000) with terms of n/60, f.o.b. shipping point. Hunt estimates that merchandise with a sales value of \(800 will be returned. An invoice totaling \)120 was received by Mount on June 8 from Olympic Transport Service for the freight cost. Upon receipt of the goods, on June 8, Mount returned to Hunt \(300 of merchandise containing flaws. Hunt estimates the returned items are expected to be resold at a profit. The freight on the returned merchandise was \)24, paid by Hunt on June 8. On July 16, the company received a check for the balance due from Mount.

Instructions

Prepare journal entries for Hunt Company to record all the events in June and July.

Archer Construction Company began work on a \(420,000 construction contract in 2017. During 2017, Archer incurred costs of \)278,000, billed its customer for \(215,000, and collected \)175,000. At December 31, 2017, the estimated additional costs to complete the project total $162,000. Prepare Archer’s journal entry to record profit or loss, if any, using (a) the percentage-of-completion method and (b) the completed-contract method.

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay \(10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to \)8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.

Instructions

(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.

(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.

(c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.

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?
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