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Hello tutor, I have been trying on this question, my answer is A, but the solution is C. I know my answer is not correct, but I could not understand the solution. The liability should be recorded at 420,000, but why HTI sold already the goods but the inventory is still in SOFP when it should be recorded as cost of sales. Can you please enlight me?
Thank you!
“On December 31, X1, HTI engaged in a transaction to transfer the legal title of inventories that required time to mature. At that time, the inventories had a cost of $450,000. They were sold to a financial institution for $420,000, with an option for HTI to repurchase them on December 31, X3, for $463,050. By that date, the inventories were expected to have a market value of approximately $540,000, and it was anticipated that HTI would exercise the repurchase option.
How should the above transaction be accounted for in HTI’s financial statements for the
year ended 31 December X1?
A The inventory cost of $4-50,000 should be recognised in cost of sales and revenue of
$4-20,000 should be recognised.
B The inventories should be recorded in the statement of financial position at $4-20,000
and the $4-20,000 received should be reported as a liability. An inventory write-down of
$30,000 should be reported in profit or loss.
C The inventories should be recorded in the statement of financial position at $4-50,000
and the $4-20,000 received should be reported as a liability. There is no profit or loss
effect.
D The inventories should be recorded in the statement of financial position at $4-50,000
and the $4-20,000 received should be reported as a liability. Interest expense of
$4-3,050 using the effective interest method should be reported in profit or loss”Hi,
This is a sale and relurchase agreement where although legally there has been a sale in substance it is a loan secured on the value of the inventory.
In this instance no sale is recognised, so the inventory remains in our books as we have control of it, and the proceeds are recognised as a loan.
Thanks
On 1 October 20X2, Pricewell Co entered into a contract to construct a bridge. The total contract price was $50m and construction is expected to be completed on 30 September 20X4. The contract is expected to generate a profit for Pricewell Co. The customer obtains control of the bridge as construction takes place. Costs to date are:
Allocation of management time to obtain contract 2m
Materials, labour and overheads 12m
Depreciation of specialist plant and machinery 3mThe value of the work completed at 31 March 20X3 has been agreed at $22m and the estimated cost to complete is $10m. Pricewell Co recognises satisfaction of performance obligations determined by the value of work completed to date.
What is the profit recognised in respect of the contract at 31 March 20X3?
$5,000,000
$7,000,000
$25,000,000
O $Nilshouldnt the answer to this question be $5,000,000?
Hello tutor,
Excuse me, to reply your answer to dangkhoa.nhhtd’s question, I’m so confused with 2 problems:
1. Why the answer cannot be D. I mean, in substance, this repurchase transaction is actually a loan with mortgage (in this case is the inventories) so I think $4-3,050 is the interest expense.
2. If the answer is C, how do we deal with the $4-3,050 when payment are made?
I hope to hear from you soon.
Thank you
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