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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Installment Sale

Bailey’s Billiards sold a pool table to Sheri Sipka on October 31, 2020. The terms of the sale are no money down and payments of $50 per month for 30 months, with the first payment due on November 30, 2020. The table they sold to Sipka cost Bailey’s $800, and Bailey uses a perpetual inventory system. Bailey’s uses an interest rate of 12% compounded monthly (1% per month).

Required:

Note: Round answers to two decimal places.

1. Prepare the cash flow diagram for this sale.

2. Calculate the amount of revenue Bailey’s should record on October 31, 2020.

3. Prepare the journal entry to record the sale on October 31. Assume that Bailey’s records cost of goods sold at the time of the sale (perpetual inventory accounting).

4. Determine how much interest income Bailey’s will record from October 31, 2020, through December 31, 2020,

5. Determine how much Bailey’s 2020 income before taxes increased by this sale.

To determine

(a)

Introduction:

The future value of amount includes the compound interest and the initial cash flow. It considers the time value of money.

To prepare:

Cash Flow diagram.

Explanation

First Payment = November 30, 2020

Cashflow = $50

Interest = 12% p.a.

No. of months = 30

Com...

To determine

(b)

Introduction:

Compound interest considers the time value of money. Present value of Cashflow means the amount that should be invested to earn a specific amount on a specific date.

To calculate:

The selling price of pool table.

To determine

(c)

Introduction:

Compound interest considers the time value of money. Present value of Cashflow means the amount that should be invested to earn a specific amount on a specific date.

To record:

Journal entry for sale of pool table under perpetual inventory system.

To determine

(d)

Introduction:

Compound interest considers the time value of money. Present value of Cashflow means the amount that should be invested to earn a specific amount on a specific date.

To calculate:

The interest income for year 2020.

To determine

(e)

Introduction:

Compound interest considers the time value of money. Present value of Cashflow means the amount that should be invested to earn a specific amount on a specific date.

To calculate:

The change in income before taxes for year 2020 due to the sale of pool table.

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