Question

Recording Revenue Under Different Repurchase Agreements

On January 1, 2020, Miller Inc. sells equipment to Smith Inc. for $132,000. As stipulated in the revenue contract, Miller Inc. will buy back the equipment on December 31, 2020, for $141,240. The relevant interest rate is 7%

a. Prepare the seller’s journal entry on January 1, 2020.

Date	Account Name	Dr.	Cr.
Jan. 1, 2020	Answer

Answer	Answer
	Answer

Answer

Answer

b. Prepare the seller’s journal entry on December 31, 2020.

Date	Account Name	Dr.	Cr.
Dec. 31, 2020	Answer

Answer	Answer
	Answer

Answer	Answer
	To recognize interest.
Dec. 31, 2020	Answer

Answer	Answer
	Answer

Answer	Answer
	To record payment.

c. Assume instead that Miller has the option to buy back the equipment and the fair value of the equipment is expected to
decline through 2020. How would the answers to parts a and b change (if at all)?

Date	Account Name	Dr.	Cr.
Jan. 1, 2020	Answer

Answer	Answer
	Answer

Answer	Answer
Dec. 31, 2020	Answer

Answer	Answer
	Answer

Answer	Answer
	To recognize interest.
Dec. 31, 2020	Answer

Answer	Answer
	Answer

Answer	Answer
	To record payment.

d. Assume instead that Smith has the option to require Miller to buy back the equipment after one year for $141,240 (an amount greater than
the expected market value of the equipment at that time). How would the answers to parts a and b change (if at all)?

Date	Account Name	Dr.	Cr.
Jan. 1, 2020	Answer

Answer	Answer
	Answer

Answer	Answer
Dec. 31, 2020	Answer

Answer	Answer
	Answer

Answer	Answer
	To record interest.
Dec. 31, 2020	Answer

Answer	Answer
	Answer

Answer	Answer
	To record payment.

Answer 1

a. Prepare the seller’s journal entry on January 1, 2020.

In this scenario ,  Miller Inc. has the obligation or the right to repurchase the asset is for an amount greater than or equal to the selling price of $ 132000 so the transaction is a financing transaction.

Accounting entry will be :-

for amount received from M/s Smith Inc At the time delivery

b. Prepare the seller’s journal entry on December 31, 2020.

( To recognise interest expense @7% on 132000).

To recognize payment for equipment received back at the end of year.

C. Assume instead that Miller has the option to buy back the equipment and the fair value of the equipment is expected to decline through 2020. How would the answers to parts a and b change (if at all)?

a & b will remain same. However, an additional entry of Loss due to reduction of fair value of equipment will be accounted for at year end.

d. Assume instead that Smith has the option to require Miller to buy back the equipment after one year for $141,240 (an amount greater than the expected market value of the equipment at that time). How would the answers to parts a and b change (if at all)?

(In this case Smith incorporation has significant economic interest to exercise the put option and to sale bac the equipment to Miller. As Smith has significant economic interest and it will exercise, It's accounting will be same to Miller). So Accounting entry will be :-

For amount received from M/s Smith Inc At the time delivery

b. Prepare the seller’s journal entry on December 31, 2020.

( To recognise interest expense @7% on 132000).

To recognize payment for equipment received back at the end of year.