Costs of purchase – financing element
Entity E purchases merchandise on Nov 01, 01. Delivery takes place on the same day. In the case of (normal) deferred settlement terms of one month, the purchase price would be CU 200. However, E and its supplier stipulate that payment has to be made on Nov 30, 02, but at an amount of CU 212 (CU 200 plus interest of 6% for one year).
Required
Prepare any necessary entries in E”s financial statements as at Dec 31, 01. Should it be necessary to recognize interest expense, assume that E recognizes interest expense on a straight-line basis due to materiality considerations.
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