Question

While investigating an auto dealership you calculate the following (refer to the IRS's ATG on Auto Dealerships):

From 'window sticker':

MSRP                    $10,000

Destination Charges         400

MSRP Retail Total     $10,400

From Dealer Invoice:

Vehicle Factory Wholesale Price     $9,000

Destination Charges                              400

Advertising Association 100 1%of MSRP

Holdback: 300 3% of MSRP

Total Invoice Price    $9,800

Holdback: coded amount is (300) 3% OF MSRP

Inventory Cost to the Dealer             $9,500

1. What entry should the dealer make initially and when the holdback is received?
2. Should the dealer include the holdback in inventory? Why?

Answer 1

For journal entry for first case:

Account receivable A/c Dr $9500

Hold back receivable A/c Dr $ 300

To revenue A/c $9,800

Journal entry for Hold back received:

Bank A/c Dr $300

To Hold back A/c $300

For Second case we should not included in inventory because material transferred to seller. If risk and rewards not transfer to seller we need to include the inventory.