Question

Novak Inc. enters into an agreement on March 1, 2020, to sell Werner Metal Company aluminum ingots. As part of the agreement, Novak also agrees to repurchase the ingots on May 1, 2020, at the original sales price of $250,000 plus 3%. (Because Novak has an unconditional obligation to repurchase the ingots at an amount greater than the original sales price, the transaction is treated as financing.)Required:A) Prepare the journall entry necessary on March 1, 2020.B) Prepare the journal entry for the repurchase of the ingots on May 1, 2020.

Answer 1

A. March 1, 2020

Werner Metal Company $250,000 (Debit)

Sales $250,000 (Credit)

(Sale of aluminium ingots)

B. May 1, 2020

Purchases $257500* (Debit)

Werner Metal Company $257500 (Credit)

(Repurchase of aluminium ingots)

Step-by-step explanation:

*250,000 x 3% = 7500

250,000 + 7500 = 257500.

Journal entries must always tally. i.e. the value on the debit side must always be the same as the value on the credit side. It is easier to understand which transaction comes on which side by observing what happens to the cash flow.

For example, in A. cash is coming into the business in the form of the debtor Werner Metal Company, hence the debtor is debited. At the same time, we know as an accounting rule that sales are always a credit entry.

In B. cash is moving out of the business and we are obliged to pay to Werner Metal Company, who is a creditor now. Thus, it is a credit entry. As an accounting rule, we also now that purchases are a debit entry.

Hope this helps! :)