Answered: What entry would you use to account for…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

The Jaecke Group, Inc. manufacturers various kinds of hydraulic pumps. In June 2021, the company signed a four-year purchase agreement with one of its main parts suppliers, Hydraulics, Inc. Over the four-year period, Jaecke has agreed to purchase 100,000 units of a key component used in the manufacture of its pumps. The agreement allows Jaecke to purchase the component at a price lower than the prevailing market price at the time of purchase. As part of the agreement, Jaecke will lend Hydraulics $200,000 to be repaid after four years with no stated interest (the prevailing market rate of interest for a loan of this type is 10%). Jaecke’s chief accountant has proposed recording the notes receivable at $200,000. The parts inventory purchase from Hydraulics over the next four years would then be recorded at the actual prices paid. You do not agree with the chief accountant’s valuation of the note and his intention to value the parts inventory acquired over the four-year period of the agreement at actual prices paid. What entry would you use to account for the initial transaction and why do you have a different opinion than the chief accountant? What entry would you use to account for the subsequent purchase of 25,000 units of the component for $650,000 when it’s market value is 26.60 per unit and why is this one different as well?

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