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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

Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay \(2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters for 2 months at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the counters due to the delay, Stadium has provided a deposit of \)300,000.

Instructions

(a) Explain this type of revenue recognition transaction.

(b) What factors should be considered in determining when to recognize revenue in this transaction?

(c) Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time the $300,000 deposit.

(Allocate Transaction Price) Geraths Windows manufactures and sells custom storm windows for three-season porches. Geraths also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Geraths enters into the following contract on July 1, 2017, with a local homeowner. The customer purchases windows for a price of \(2,400 and chooses Geraths to do the installation. Geraths charges the same price for the windows irrespective of whether it does the installation or not. The installation service is estimated to have a standalone selling price of \)600. The customer pays Geraths \(2,000 (which equals the standalone selling price of the windows, which have a cost of \)1,100) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2017, Geraths completes installation on October 15, 2017, and the customer pays the balance due. Prepare the journal entries for Geraths in 2017. (Round amounts to nearest dollar.)

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.

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’s performance obligations in this contract?

In measuring the transaction price, explain the accounting for (a) time value of money and (b) noncash consideration.
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