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Hello Mike
I have 2 questions related to ACCA and the profession but not necessarily F7. I’m posting it here because I think you would be a good person to ask. I hope you don’t mind.Q1. Lets say there’s a furniture & appliance store that sells to customers on hire purchase. This means that in the legality of the situation, the F&A store would be the owner until the full payments are made. Regarding substance over form however, ownership would be transferred when the customer has the risks and responsibility of the furniture & appliances. Suppose a customer makes a down-payment on an item on 29 Dec. but its still at the store at year end, 30 Dec. when inventory count is taking place, should that item be included in the store’s inventory?
Q2. There’s a business (ABC) which is family owned (the X family). The members of the family are the directors. The job description of a particular employee on ABC’s payroll is “housekeeper at Mr X’s property”. This sounds weird, what do you think?
Hello Nari,
I was curious with your question and has answered it as below. Hope you find this helpful. 🙂
Q1. This should still be counted under the total inventory on hand. But could be separated as a smaller subset account which refers to Inventory on customer hold. Your entry on accounting could be as follows. Initial entry could be as follows.
Accounts Receivable Dr DP- Total Sales
COH (DownPayment) Dr DP
Sales Cr Total SalesInventory available for Sale Cr XX
Inventory on Hold Dr XXQ2. Personal Housekeeper should not be part of any payroll. Unless the the ABC Company is a real estate – pension house renting facility or a hotel chain, where in Mr X’s Property is part of the Asset of the company. Then payment for the cleaning and housekeeping can be part of the payroll 🙂
Hi Nari
I note with interest Marjie’s involvement but feel I need to disagree with her 🙁
I agree with your observation that we are facing in question 1 a situation of substance over form. A “sale” is made when the customer signs the hire-purchase agreement so the furniture is no longer (substance-wise) ours and should be excluded from inventory.
Can you imagine the headaches that companies and auditors would face if the inventory were to be treated as still belonging to the company?! There would need to be extensive work carried out in determining the cost value of all that furniture in the hands of customers where the hire-purchase contract has not yet been settled in full.
Incidentally, at the date when I was emigrating from the UK, if my memory serves me correctly, a seller of goods on hire-purchase could not recover the goods in the event of non-payment where greater than 30% of the instalments’ value had been paid. But my memory could be wrong or hire-purchase legislation could have changed in those last 11 years.
In answer to question 2, Marjie has a valid point in terms of the work carried out by the employee – if the work is for cleaning company premises (hotels, business owned and used apartments and so on) then it would be an allowable expense.
If the employee’s work is purely (or substantially) cleaning the personal residence of a director, then that is a benefit in kind assessable for tax purposes on the director.
This is so even if the employee is only partially involved (say 10%) in cleaning personal residences of directors, this 10% is not a deductible expense for the company and should instead be added into the remuneration calculation of those directors that are receiving the benefit
OK?
Marjie, I assume that you are new to the site! There is a clue in the title of the page “Ask the tutor” that indicates that questions posted on this particular page are addressed to me.
If the question had been on the general forum for F7, then please do join in with your contributions which are sincerely welcomed.
But, if the question is on “Ask the tutor”, could you please hold back from answering
Thanks 🙂
Ok Mike, thanks for your answer but let me make sure I have this clear, you are saying that….
for Q1 the sale should be excluded from the inventory count?
for Q2 that particular employee’s salary should not be included in Company ABC’s payroll?What really had me wondering in Q1 was the fact that although it may seem as substance over form, the customer has not yet taken the goods, as such he bears no risks and rewards as at 30 Dec.
Risk passes with ownership – whether or not the customer has actually taken possession of the goods is irrelevant. When the customer signs the hire purchase contract, that’s when the risk passes unless ……. !
……. unless the hire purchase contract says otherwise. For example, the contract could say that risk shall only pass when the customer takes possession of the furniture. But that would be an unlikely clause within a hire-purchase contract.
The employee? This should NOT be included within the company’s payroll costs unless ……
…… unless the employee is actually working as a cleaner in property belonging to the company as distinct from property owned by a director of the company
OK?
Thanks Mike.
Yes I am new to this site :). did not notice that this is ask a tutor question
On Q1, The premise is that the goods accountability and ownership transfer. That if the agreement between the client and the company, is that company owns unless otherwise fully paid, regardless of the actual physical location. I would say this is still own by company.
So I would say it will depend on what has agreed upon on contracts.I do agree that it is hard for auditors and companies to track though
“is that company owns unless otherwise fully paid, regardless of the actual physical location”
In a normal commercial transaction, such a clause within a sale (or hire purchase) agreement would be MOST unusual (unless such clauses have grown dramatically in popularity since I left the UK)
They were first tested in Court in the UK in a legal case called Aluminium Industriie Vaassen v Romalpa Aluminium. In that case, a Dutch company retained title to their goods (sheets of aluminium) through the process of conversion and into the hands of subsequent purchasers until the debt owed by Romalpa had been settled in full. Romalpa went into liquidation without having first settled the outstanding debt and Aluminium Industriie claimed the goods.
The liquidator fought and said “Go away” but the Court upheld Aluminium Industriie’s claim and they were able to recover their inventory and the cash from the Romalpa Receivables in respect of the ale of the aluminium (now in product form like aluminium / tin-foil plates)
But this is RARE
In a normal commercial transaction, title to the goods passes when the goods are sold on credit (or when cash is paid if it’s a cash transaction) and in the original question from Nari about a sale of furniture on hire-purchase, the normal situation would be that title passes (and therefore the sale is recorded as a sale) on signing the hire-purchase agreement
Of course, it COULD say in the sale agreement or the hire-purchase agreement that “title to the goods shall not pass until ……” but in the absence of such a clause, I would take it that the goods should be treated as sold
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