Question

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

The cash received is $204,000.

Step-by-step solution

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.

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:

$\begin{array}{rcl}\mathrm{Interest}\mathrm{expense}& =& \mathrm{Sales}\mathrm{price}\times \mathrm{Interest}\mathrm{expense}\\ & =& \$200,000\times 2\%\\ & =& \$4,000\end{array}$