Question

Zagat Inc. enters into an agreement on March 1, 2014, to sell Werner Metal Company aluminum ingots in 2 months. As part of the agreement, Zagat also agrees to repurhcase the ingots in 60 days at the original sales price of $200,000 plus 2%. (Because Zagat has an unconditional obligation to repurchase the ingots at an amount greater than the original sales price, the transaction is treated as financing.)
A) Prepare the journall entry necessary on March 1, 2014.


B) Prepare the journal entry for the repurchase of the ingots on May 1, 2014.

Answer 1

Answer:

A. Debit Cash with $200,000, and Credit Liability to Werner Metal Company with $200,000 .

B. Debit interest expense and Liability to Werner Metal Company  with $4,000 and $200,000 respectively, Credit cash with $204,000.

Explanation:

A) Prepare the journall entry necessary on March 1, 2014.

Details                                                     Dr ($)                 Cr ($)

Cash                                                      200,000

Liability to  Werner Metal Company                             200,000

Being cash received from the agreement to sell aluminum ingots in 2 months.

B) Prepare the journal entry for the repurchase of the ingots on May 1, 2014.

 Details                                                       Dr ($)                 Cr ($)

Interest expense ($200,000 × 2%)          4,000

Liability to  Werner Metal Company     200,000

Cash                                                                                   204,000

Being settlement of liability with interest for the repurchase of the ingots.