Question

In: Accounting

On December 31, 20x0, a bus manufacturer sold 10 busses at a price of $350,000 each....

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.

Solutions

Expert Solution

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

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