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Ardglen sells its maturing inventory, with a cost of $1 million, to Alba, a bank, for its fair value of $1.5 million on 1 January 20X1. Ardglen has the option to repurchase the inventory on 31 December 20X8 for $2.2 million. Ardglen will continue to hold the inventory within its warehouse as normal throughout the period, and so is responsible for its maintenance and insurance. At 31 December 20X8 the inventory is expected to have a fair value of $4 million.
Giving reasons, show how Ardglen should record the above transaction during the year ended 31 December 20X1.
how is the secured loan amount$ 07m?
I think that you’ve misread the detail in their answer. They are not saying that the loan is $0.7 million, they are saying that the interest on the loan is $0.7 million.
We have effectively borrowed $1.5 million and will repay $2.2 million, so the difference is the interest.