In: Accounting
On December 31, 20x0, a bus manufacturer sold 10 busses at a price of $350,000 each. The bus manufacturer’s incremental borrowing rate is 4%. The bus manufacturer estimates the customer’s incremental borrowing rate to be 5%. The bus manufacturer is a publicly accountable entity.
Required –
For each of the following scenarios, prepare the journal entries on the books of the bus manufacturer for the years ended December 31, 20x0, 20x1 and 20x2 for the following terms of payment:
a. 0% interest, pay the $3,500,000 on December 31, 20x2.
b. 20% down, 2% interest on the balance, pay the balance ($2,800,000) on December 31, 20x3.
c. Equal annual payments over 5 years with the first payment due on December 31, 20x1. The bus manufacturer used a 1.5% interest rate when calculating the annual payment.
d. The customer had the option to pay a cash price of $315,000 per bus but instead opted to pay the full $3,500,000 on December 31, 20x2 at 0% interest.
e. Redo item (c) on the assumption that the bus manufacturer is a private company using ASPE and wants to keep things as simple as possible.
a. 0% interest, pay the $3,500,000 on December 31, 20x2. | ||||||
Dec 31 20X0 | Accounts Receivable | $ 35,00,000 | ||||
Sales | $35,00,000 | |||||
Dec 31 20X2 | Cash | $ 35,00,000 | ||||
Account Receivable | $35,00,000 | |||||
b. 20% down, 2% interest on the balance, pay the balance ($2,800,000) on December 31, 20x3. | ||||||
Dec 31 20X0 | Accounts Receivable | $ 35,00,000 | ||||
Sales | $35,00,000 | |||||
Dec 31 20X0 | Cash | $ 7,00,000 | ||||
Accounts Receivable | $ 7,00,000 | |||||
Dec 31 20X1 | Cash | $ 56,000 | ||||
Interest Income | $ 56,000 | |||||
To receive Interest on the Balance of $2,800,000 @ 2% | ||||||
Dec 31 20X2 | Cash | $ 56,000 | ||||
Interest Income | $ 56,000 | |||||
To receive Interest on the Balance of $2,800,000 @ 2% | ||||||
Dec 31 20X3 | Cash | $ 56,000 | ||||
Interest Income | $ 56,000 | |||||
To receive Interest on the Balance of $2,800,000 @ 2% | ||||||
Dec 31 20X3 | Cash | $ 28,00,000 | ||||
Accounts Receivable | $28,00,000 | |||||
To record the cash received the Balance of $2,800,000 | ||||||
c. Equal annual payments over 5 years with the first payment due on December 31, 20x1. The bus manufacturer used a 1.5% interest rate when calculating the annual payment. | ||||||
Dec 31 20X0 | Accounts Receivable | $ 35,00,000 | ||||
Sales | $35,00,000 | |||||
Dec 31 20X1 | Cash | $ 7,31,813.0 | ||||
Accounts Receivable | $ 7,31,813 | |||||
Dec 31 20X2 | Cash | $ 7,31,813.0 | ||||
Accounts Receivable | $ 7,31,813 | |||||
Dec 31 20X3 | Cash | $ 7,31,813.0 | ||||
Accounts Receivable | $ 7,31,813 | |||||
Dec 31 20X4 | Cash | $ 7,31,813.0 | ||||
Accounts Receivable | $ 7,31,813 | |||||
Dec 31 20X5 | Cash | $ 7,31,813.0 | ||||
Accounts Receivable | $ 7,31,813 | |||||
d. The customer had the option to pay a cash price of $315,000 per bus but instead opted to pay the full $3,500,000 on December 31, 20x2 at 0% interest. | ||||||
Dec 31 20X0 | Cash | $ 31,50,000 | ||||
Cash Discount | $ 3,50,000 | |||||
Sales | $35,00,000 |