Kim's Auction House (KAH) facilitates estate sales. It earns 20% commission on all completed sales, which is deducted from the "hammer price" (i.e. price agreed to by the winning bidder). Almost two years ago, Leonard (a.k.a. Spock) passed away. On 12/31/15, Estate of Leonard signs a fully binding consignment agreement and delivers Star Trek memorabilia to KAH's showroom in Beverly Hills. The wholesale value of the memorabilia is $1 million, but Kim, a Star Trek expert, expects to sell it for $2 million in a well publicized auction.
KAH is responsible for collecting payment in order to complete a
sale. KAH offers buyers a discount of 1% of the hammer price if he
or she pays within 10 days. This discount comes exclusively out of
KAH's commission. KAH uses the net method to account for this
discount. On 5/11/16, KAH has collected $1,1880,000 in cash.
You are CPA for KAH. Please prepare GAAP journal entries for period
of 5/1 to 5/11/16. Show your calculation!
| Journal Entries | ||||
| 05/01/2016 | Accounts receivables | DR. | 1,18,80,000 | |
| Discount on sales | DR. | 1,20,000 | ||
| To commission | CR. | 24,00,000 | ||
| To Sale of memorabilia | CR. | 96,00,000 | ||
| (Being sale made with 1% discount & 20% commission) | ||||
| 05/11/2016 | Cash | DR. | 1,18,80,000 | |
| ToAccounts receivables | CR. | 1,18,80,000 | ||
| (Receivables on account of sale of memorabilia collected) | ||||
| Workings | ||||
| Net amount collected | 1,18,80,000 | (net of 1% discount) | ||
| Grossed up (Amount/.99) | 1,20,00,000 | Sale price offered/ agreed | ||
| Discount given | 1,20,000 | 1% on Gross value | ||
| 20% commission on Gross value | 24,00,000 | (20% on 1.2 million $) | ||
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