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toushiga
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Hello Sir,
In the bpp textbook for repurchase agreement in the Chapter 6. Revenue
the extract as below:(for contract with call option)
“As control has not been transferred, the entity accounts for the transaction as a financing arrangement, because the exercise price is above the original selling price. The entity continues to recognise the asset and recognises the cash received as a financial liability. The difference of $0.1m is recognised as interest expense.The double entry should be DR asset $1.0m CR fianacial liability $1.1m and Dr interest expense $0.1m ,and the question is below
“If on 31 December 20X7 the option lapses unexercised, the customer now obtains control of the asset. The entity will derecognise the asset and recognise revenue of $1.1m (the $1m already received plus the
$0.1m charged to interest).”So it will be Cr Asset $1.0m and CR revenue $1.1m
where is the Dr 0.1m? and how about the financial liability ?
What is the correct double entry for this?Thank you.
P2-D2
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Hi,
Given that this is a financing arrangement then it is highly unlikely that the option will lapse unexercised.
If it did, then it wouldn’t be a case of recognising revenue as it is not an actual sale of goods, it is just a financing arrangement. The accounting entry would be that the cash is paid back (CR Bank) and the financial liability is extinguished (DR FL).
The “selling” entity would keep the inventory, and it would only transfer if we didn’t have the cash to pay back the financing.
Thanks
toushiga
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