Zagat Inc. enters into an agreement on March 1, 2014, to sell Werner Metal Company aluminum ingots in 2 months. As part of the agreement, Zagat also agrees to repurhcase the ingots in 60 days at the original sales price of $200,000 plus 2%. (Because Zagat has an unconditional obligation to repurchase the ingots at an amount greater than the original sales price, the transaction is treated as financing.)

A) Prepare the journall entry necessary on March 1, 2014.

B) Prepare the journal entry for the repurchase of the ingots on May 1, 2014.

A. Debit Cash with $200,000, and Credit Liability to Werner Metal Company with $200,000.

B. Debit interest expense and Liability to Werner Metal Company with $4,000 and $200,000 respectively, Credit cash with $204,000.

Explanation:

A) Prepare the journall entry necessary on March 1, 2014.

Details Dr ($) Cr ($)

Cash 200,000

Liability to Werner Metal Company 200,000

Being cash received from the agreement to sell aluminum ingots in 2 months.

B) Prepare the journal entry for the repurchase of the ingots on May 1, 2014.

Details Dr ($) Cr ($)

Interest expense ($200,000 * 2%) 4,000

Liability to Werner Metal Company 200,000

Cash 204,000

Being settlement of liability with interest for the repurchase of the ingots.