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Xavier sells its head office, which cost $10 million, to Yorrick, a bank, for
$10 million on 1 January 20X2. Xavier has the option to repurchase the
property on 31 December 20X5, four years later, at $12 million. Xavier
will continue to use the property as normal throughout the period and so
is responsible for its maintenance and insurance. The head office was
valued at transfer on 1 January 20X2 at $18 million and is expected to
rise in value throughout the four-year period.
Giving reasons, show how Xavier should record the above during
the first year following transfer.Now here my question is – why facing loss in the price is for Yorrick and if made profit with increase in price it for Xaviers.
Xavier has an option to repurchase at $12 million and it is currently valued at $18 million, so if it is expected to rise in value then Xavier would definitely buy it back for the cheaper $12 million as it makes economic sense. Xavier would therefore continue to record the asset in its accounts and record a loan for the proceeds.
If prices fell and it ended up that we had an option to buy at $12 million but the price in five years was les than $12 million then we wouldn’t buy something at a higher price than what it is worth on the market, so we would derecognise the asset and record the sale.
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