Question

Waterway Corp. sells idle machinery to Enyart Company on July 1, 2017, for $46,000. Waterway agrees to repurchase this equipment from Enyart on June 30, 2018, for a price of $48,760 (an imputed interest rate of 6%). Prepare the journal entry for Waterway for the transfer of the asset to Enyart on July 1, 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation Debit Credit SHOW LIST OF ACCOUNTS

Prepare any other necessary journal entries for Waterway in 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Date Account Titles and Explanation Debit Credit Dec. 31, 2017

Prepare the journal entry for Waterway when the machinery is repurchased on June 30, 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Date Account Titles and Explanation Debit Credit Jun. 30, 2018

(To record interest)

(To record payment)

Answer 1

In this case, due to the agreement to repurchase the equipment, Waterway corp continues to have the control of the asset and therefore this agreement is a financing transaction and not a sale. If the sale and repurchase agreement is a financing arrangement, the entity shall continue to recognise the asset and shall recognise a financial liability for any consideration received from the customer. The entity shall recognise the difference between the amount of consideration received from the customer and the amount of consideration paid to the customer as interest and, if applicable, holding costs (for example, insurance).

Thus the asset is not removed from the books of Waterway corp. The entries to record to financing are as follows.

a)

01-Jul-17

Cash...................................................................Dr $40,000

$46,000

Loan from Enyart Company.................. Cr $40,000

$46,000

(being 46000 received from Enyart company in exchange of asset to be repurchased)

b)

Dec 31 2017

InterestExpense.......................................................Dr. $ 1,200

$1,380

Loan from Enyart Company

$1,380

($46,000 X 6% X 1/2)............................Cr.

(Interest expense @6% p.a impputed interest rate recognised for half year)

c)

30-06-20118

InterestExpense.......................................................Dr. 5520

$1,380

Loan from Enyart Company

($46,000 X 6% X 1/2)............................Cr. $1380

(Interest expense @6% p.a imputed interest rate recognised for half year)

30-Jun-18

Loan from Enyart Company ......................................Dr. $42400

$48,760

Cash.....................................................Cr. $48760

(The loan reapid and the asset repurchased)