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Sale and repurchase

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Sale and repurchase

  • This topic has 1 reply, 2 voices, and was last updated 6 years ago by P2-D2.
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  • Author
    Posts
  • March 22, 2019 at 2:58 am #510022
    toushiga
    Participant
    • Topics: 424
    • Replies: 172
    • ☆☆☆☆

    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.

    March 23, 2019 at 7:46 am #510118
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7171
    • ☆☆☆☆☆

    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

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