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Dear Mike,
An entity enters a contract with the customer for the sale of a tangible asset at 1/1/2017 for 1$m with one of two cases below:
Case 1: The contract includes a call option that gives the entity the right to repurchase the asset for 1.1$m on or before 31/12/2017.
Case 2: The contract includes a put option that obligates the entity to repurchase the asset at the customer’s request for $900,000 on or before 31/12/2017 at which time the market value is expected to be $750,000.
Can you tell me the accounting entry at 1/1/2017 and at 31/12/2017 if the option exercised or un-exercised?
Thanks for your time!
Case 1 looks like a secured loan and the asset isn’t really sold
Dr Cash $1 million
Cr Loan $1 millionCase 2 looks to be a contrived hypothetical situation that is never likely to happen
I’m not even sure that a put OPTION would create an OBLIGATION – surely a put option would create a contingent liability rather than an obligation
That being so, I would record the sale:
Dr Cash $1 million
Cr TNCA Disposal Account $1 millionand account for the profit or loss on disposal in the normal way
OK?
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