Chapter 18: Q24Q. (page 1031)
What are the reporting issues in a sale with a repurchase agreement?
If a business sells a product one time and promises to buy it back the next, the legal title may have changed, but the economic basisof the contract is that the seller retains ownership risks.
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Guillen, Inc. began work on a \(7,000,000 contract in 2017 to construct an office building. Guillen uses the completed-contract method. At December 31, 2017, the balances in certain accounts were Construction in Process \)1,715,000, Accounts Receivable \(240,000, and Billings on Construction in Process \)1,000,000. Indicate how these accounts would be reported in Guillen’s December 31, 2017, balance sheet.
Jupiter Company sells goods to Danone Inc. by accepting a note receivable on January 2, 2017. The goods have a sales price of \(610,000 (cost of \)500,000). The terms are net 30. If Danone pays within 5 days, however, it receives a cash discount of $10,000. Past history indicates that the cash discount will be taken. On January 28, 2017, Danone makes payment to Jupiter for the full sales price.
Instructions
(a) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the net method.
(b) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the gross method.
What is the nature of a sale on consignment?
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.
(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.
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