Reference no: EM132344712

Question

Indigo Ranch & Sweet is a distributor of ranch and farm equipment. Its products range from small tools, power equipment for trench-digging and fencing, grain dryers, and barn winches.

Most products are sold direct via its company catalog and Internet site. However, given some of its specialty products, select farm implement stores carry Indigo's products. Pricing and cost information on three of Indigo's most popular products are as follows.

Item

Standalone

Selling Price (Cost)

Mini-trencher

$ 3,600 ($2,000)Power fence hole auger

1,300 (900)Grain/hay dryer

13,800 (11,300)

Respond to the requirements related to the following independent revenue arrangements for Indigo Ranch & Sweet.

(a) On January 1, 2017, Indigo sells 30 augers to Mills Farm & Fleet for $39,000. Mills signs a 6-month note at an annual interest rate of 12%. Indigo allows Mills to return any auger that it cannot use within 60 days and receive a full refund. Based on prior experience, Indigo estimates that 5% of units sold to customers like Mills will be returned (using the most likely outcome approach). Indigo's costs to recover the products will be immaterial, and the returned augers are expected to be resold at a profit.

Prepare the journal entry for Indigo on January 1, 2017.

(b) On August 10, 2017, Indigo sells 16 mini-trenchers to a farm co-op in western Minnesota. Indigo provides a 4% volume discount on the mini-trenchers if the co-op has a 15% increase in purchases from Indigo compared to the prior year. Given the slowdown in the farm economy, sales to the co-op have been flat, and it is highly uncertain that the benchmark will be met.

Prepare the journal entry for Indigo on August 10, 2017.