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Kohli Inc., an equipment dealer, enters an agreement whereby it sells equipment on November 1, 2019, to Ratnatunga Company fo
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Answer #1

Kohli Inc. has made an agreement with Ratnatunga to sell and repurchase his inventory.The repurchase price is not based on market value but based on the original selling price plus a notional interest. This is essentially a financing arrangement, so sales will not be booked. Instead a financing transaction (like loan) should be recorded. Following are the journal entries to be passed by Kohli Inc.:

Reference Date Particulars 01-11-2019 Cash A/C To Liability to Ratnatunga Company (Being cash received through product financ

Working Note 1

A.Interest expense for 2 months (Nov and Dec 2019) = $1,00,000 x 12% x 2/12 = $2,000

B.Closing balance of Liability to Ratnatunga Company on 31st Dec 2019 = Opening balance of Liability to Ratnatunga Company+ Interest expense = $1,00,000 + $2,000 = $1,02,000

Working Note 2

A.Interest expense for 1 month (Jan 2020) = Closing balance of Liability to Ratnatunga Company on Dec 2019 x 12% x 2/12 = $1,02,000 x 12% x 1/12 = $1,020

B.Closing balance of Liability to Ratnatunga Company on 31st Jan 2020 = pening balance of Liability to Ratnatunga Company+ Interest expense for Nov and Dec 2019 + Interest expense for Jan 2020 = $1,00,000 + $2,000 + $1,020 = $1,03,020.

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