Sanchez Co. enters into a contract to sell Product A and Product B on January 2, 2014, for an...

Question:

Sanchez Co. enters into a contract to sell Product A and Product B on January 2, 2014, for an upfront cash payment of $213,000. Product A will be delivered in 2 years (January 2, 2016) and Product B will be delivered in 5 years (January 2, 2019). Sanchez Co. allocates the $213,000 to Products A and B on a relative standalone selling price basis as follows.

Standalone Selling Prices Percent Allocated Allocated Amounts
Product A $56,800 25% $53,250
Product B $170,400 75% $19,750
$227,200 $213,000

Sanchez Co. uses an interest rate of 6%, which is its incremental borrowing rate. (Hint: given the (discounted) upfront payment, accretion of the contract liability will need to be recorded)

1. Prepare the journal entries necessary on January 2, 2014, and December 31, 2014. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)

Date Account Titles & Explanation Debit Credit
Jan 2, 2014
Dec 31, 2014

2. Prepare the journal entries necessary on December 31, 2015. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)

Date Account Titles & Explanation Debit Credit
Dec 31, 2015

3. Prepare the journal entries necessary on January 2, 2016. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)

Date Account Titles & Explanation Debit Credit
Jan 2, 2016,

Interest Expenses:

Interest Expenses means is the kind of expenses that are charged on loan or any debt and this will be recorded in the debit side of the income statement.

Answer and Explanation:

Journal Enyty:

Journal Entry:
Date Accounts and Explanation Debit Credit
2014
2-Jan Cash $213,000
Unearned sales revenue $213,000
31-Dec Interest Expenses (213000 * .06) $12,780
Interest Payable $12,780
2015
31-Dec Interest Expenses (213000 + 12780 ) * 0.06 $135,468
Interest payable $135,468
2016
2-Jan Cash $53,250
Interest Payable (12780 + 135468) * 0.25 $37,062
Sales revenue 90312


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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