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hi mike, following is an adjustment of revenue,
Revenue includes a 3 million sale which are not biological assets, the carrying amount was 2 million, Moston is still in possession of the goods( but have not been included in the inventory count) and has an unexercised option to repurchase them in any time in the next three years, In three years time, the goods are expected to be worth 5 million, and the repurchase price, will be original price plus 10% interest.
IT mentions that is infact a financing arrangement and thus since control does not pass ot customer, we cant recogize the revenue. so it remones 3 million from sale and 2 million from cost of sales, but should it not add back that 2 million as closing inventory ?? that is my problem as bpp also mentions that the company continues to recognize the asset and trats the cash as a financial liability?
Also could you please tell me the journal entires,
will it be
Dr sales 3000
Cr cost of sales 2000,and then??
“will it be
Dr sales 3000
Cr cost of sales 2000”No!
If you reduce cost of sales by the reversal of the sale, you then must play around with the inventory … but more of that in a second
The correct entry is to credit a loan account – it’s a secured loan that’s pretending to be a sale
Now, the inventory
You ARE correct to reduce cost of sales but not as part of the correcting journal
When we bring that $2 million back into inventory, that reduces cost of sales because it increases closing inventory
That reduction in cost of sales then means that profit for the year is increased and, to balance that, the asset side of the statement of financial position is increased by the addition of $2 million into current assets inventory
OK?
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