Reference no: EM132359648

Recording Cash Discounts

On April 20, 2018, two years before maturity, Van Gogh Company retires $150,000 of its 5.6% Schmidt Corp. purchases materials from a supplier that offers credit terms of 2/15, n/60. It semi-annual bonds payable at the price of 105. The bond book value April 20, 2018 is f155,000, purchased $16,500 of merchandise inventory from that supplier on Jan 20, 2018. reflecting an unamortized premium; Bond interest is fully paid and recorded up to the date of retirement.

a) Assume that Schmidt Corp. paid the invoice on Feb. 1, 2019. Prepare journal entries to record the purchase of the inventory and the cash payment to the supplier using the net- of-discount method.

a) What is the gain or loss on retirement of those bonds?

Assume that Schmidt Corp. paid the invoice on Feb. 15, 2019. Prepare journal entries to record the purchase of the inventory and the cash payment to the supplier using the net- of-discount method, Compute the cost of a lost discount as an annual percentage rate.

Account

Credit

b) What was the market rate of the bond according to the book value? (What rate produces a PV of E155,000 on this (150,000; 5.6% semi-annual bonds with 2 years left?)

Lost discount as an annual percentage rate.

Warranty Liability and Expense

Pavo Real sells a sprinkler that carries a 1-year unconditional warranty against product failure.

Pavo Real estimates that between the sale and the lapse of the product warranty, 3.2% of the total 250,000 units sold this period will require repair or replacement at a cost of $5.50 per unit.

A warranty liability $5,000 is currently on the balance sheet. How much expense must Pavo Real report in its income statement if f1,000 is still needed to cover warranties in the past? What amount of additional warranty liability must it report on its balance sheet for the year?