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Hi Sir
On 1 october 20×2 atlas sold $10 million of maturing invotory to xpede. the cost of the goods at the date of sale was $7 million and atlas has the option to repurchase the goods at any time within 3 years of the sale at a price of $10 million plus accrued interest from the date of sale at 10% per annum. At 31 march 20×3 the option had not been exercised but it is likely that it will be before the date it lapses.
What should be the net effect on profit or loss of this transaction for the Y/E 31 march 20×3?
I got credit 2500 (3000 profit minus 500 interest), but the answer is just 500. what happen to the profit realised on the sales of $10 million?thanks
It’s not a sale! Substance over form steps in here! Are all the risks and rewards of ownership transferred when that invoice was raired and the money received? The transaction is in fact a secured loan so the 500 loan interest goes to statement of profit or loss. The $10 million does NOT go into revenue, the $7 million is brought back into inventory
The correct double entry to record the transaction is NOT Dr Cash Cr Revenue but should be Dr Cash Cr Loan Account
You need to get happy with this type of transaction – it’s a frequent visitor to F7 exams
Ok?
Excuse Me,
Can you please explain to me the concept of this “Maturing Inventory”
Regards
When a distillery makes whisky, it cannot be sold as whisky until it is at least three years old
So you mix various ingredients, but them in a barrel, and leave it for three years
That three year period is the period throughout which the whisky is maturing
I believe that that explains maturing inventory!
OK?
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