Question

In: Accounting

On August 1, 2018, McLaren Inc. sold inventory to Klondike Company and received Klondike’s 9-month, noninterestbearing...

On August 1, 2018, McLaren Inc. sold inventory to Klondike Company and received Klondike’s 9-month, noninterestbearing $100,000 note due April 30, 2019. The cost of the inventory was $60,000. The discount rate was 8%. McLaren records adjusting entries annually at December 31.

a. Record the August 1, 2018, journal entry for McLaren.

b. If McLaren recorded the note as an interest-bearing note on August 1, 2018, (i.e., did not record a discount on the note), how would the financial statements be misstated (overstated/understated and $ amount)?. (Hint: Record the entry without the discount and compare to your answer in part a.)

ASSETS LIABILITIES SE 2018 NET INCOME

$ $ $ $

Overstated Overstated Overstated Overstated

Understated Understated Understated Understated

c. Record the December 31, 2018, adjusting entry for McLaren.

d. If McLaren’ 2018 net income without including the Aug. 1 sale or December 31 adjusting entry was $200,000, what is the correct 2018 net income? Ignore taxes.

e. What amounts related to the note will McLaren report on its 2018 balance sheet?

f. Record the April 30, 2019, journal entry(ies) for McLaren.

Expert Solution

Answer a:

Note Receivable of value = $100,000

Invetnory cost = $60,000

Discount rate =8%

Duration from Aug 1, 2018 to Apr 30, 2019 = 9 months

Sales to be recognized = $100,000 / (1 + 8%*9/12) = $94,340

Journal Entries on August 1, 2018:

Answer (b):

If McLaren recorded the note as an interest-bearing note on August 1, 2018, (i.e., did not record a discount on the note:

Note Receivable would have been recorded at $100,000, hence Assets would have been overstated by $5,660.

Sales would have recorded as $100,000, hence net income as well as Stockholders' equity would have been overstated by $5,660.

There would be no effect on Liability.

Answer (c):

Interest revenue from April 1 2018 to Dec 31, 2018 = $94,340 * 8% * 5 / 12 = $3,145

Answer (d):

If McLaren’ 2018 net income without including the Aug. 1 sale or December 31 adjusting entry was $200,000, the correct 2018 net income:

Net Income without including the Aug. 1 sale or December 31 adjusting entry = $200,000

Add, net income on Aug 1, sale (=$94340 - $60,000) = $34,340

Add, Interest revenue income on Dec 31, 2018 = $3,145

Correct net income = $200,000+ $34,340 + $3,145

= $237,485

Answer (e):

Amounts related to the note McLaren will report on its 2018 balance sheet:

Note Receivables = $94,340

Interest Receivable = $3,145

Answer (f):

Interest for the period from Jan 1, 2019 to Apr 30, 2019 = $94,340 * 8% * 4/12 = $2,515

Journal entry on April 30, 2019:

ekkarill92 answered 2 years ago

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