Let’s Research the GAAP Bogan Company is in need of cash to finance its operatio

Q: Let’s Research the GAAP Bogan Company is in need of cash to finance its operatio

To President, Bogan. Following are the observations regarding transaction between Hall and Bogan. When inventory sold to Hall, entry should be recorded by debit Hall and credit sales. At the end of year, while preparing consolidated stateement, unrealised profit should be eliminated from overall company profit. While repurchase the same stock from hall, interest paid amount should be deducted from inventory cost

ID: 2455310 • Letter: L

Question

Let’s Research the GAAP

Bogan Company is in need of cash to finance its operations. The company creates a new company, Hall Company, which is wholly owned by Bogan. On November 1, 2016, Bogan sells inventory on credit to Hall for $50,000, which in turn immediately uses the inventory for a $40,000, 12% loan (guaranteed by Bogan) from 8th National Bank. Hall then uses the proceeds from the loan to repay $40,000 of the $50,000 owed to Bogan. Bogan agrees to continue to extend credit for 9 months to Hall for the remaining $10,000. The inventory is Hall's only asset and is stored in a public warehouse. Bogan agrees to pay Hall the $200 monthly storage fee and $400 per month for a financing fee at the end of each month. Bogan also agrees to repurchase the inventory from Hall for $50,000 at the end of July 2017. Bogan uses a perpetual inventory system; the cost of the inventory sold to Hall is $42,000. The president of Bogan has asked you how to account for this series of transactions in 2016.

Research the related generally accepted accounting principles and prepare a short memo to the president that explains how Bogan should record the sale of the inventory on November 1, 2016, and the payment of the fees at the end of November and December. Also explain how Bogan should report the recorded items in its 2016 financial statements. Cite your reference and applicable paragraph numbers.

Explanation / Answer

President,

Bogan.

Following are the observations regarding transaction between Hall and Bogan.

When inventory sold to Hall, entry should be recorded by debit Hall and credit sales. At the end of year, while preparing consolidated stateement, unrealised profit should be eliminated from overall company profit. While repurchase the same stock from hall, interest paid amount should be deducted from inventory cost

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Let’s Research the GAAP Bogan Company is in need of cash to finance its operatio

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