ocao oai -vaiue LFO procedure. You were recently hired to work in the controller

Question

ocao oai -vaiue LFO procedure. You were recently hired to work in the controller's office of the Balboa Lumber Company. Your boss, Alfred Eagleton, took you to lunch during your first week and asked a favor. "Things have been a little slow lately, and n:; we need to borrow a little cash to tide us over. Our inventory has been building up and the CFO wants to pledge the inventory as collateral for a short-term loan. But I have a better idea." Mr. Eagleton went on to describe his plan. "On July 1, 2018, the first day of the company's third quarter, we will sell $100,000 of inventory to the Harbaugh Corporation for $160,000. Harbaugh will pay us immediately and then we will agree to repurchase the merchandise in two months for $164,000. The $4,000 is Harbaugh's fee for holding the inventory and for provid- ing financing. I already checked with Harbaugh's controller and he has agreed to the arrangement. Not only wil we obtain the financing we need, but the third quarter's before-tax profits will be increased by $56,000, the gross profit on the sale less the $4,000 fee. Go research the issue and make sure we would not be violating any specific accounting standards related to product financing arrangements." Required: I. Obtain the relevant authoritative literature on product financing arrangements using the FASB Accounting Standards Codification. You might gain access at the FASB website (www.fasb.org). What is the specific citation that provides guidance for determining whether an arrangement involving the sale of inventory is "in substance" a financing arrangement? 2. What is the specific citation that addresses the recognition of a product financing arrangement? 3. Determine the appropriate treatment of product financing arrangements like the one proposed by Mr 4. Prepare the journal entry for Balboa Lumber to record the "sale" of the inventory and subsequent repurchase Eagleton

Explanation / Answer

1) The guidance for determining such an arrangement is whether or not “in substance” a financing arrangement can be found in “FASB ASC 470-40-05-2: Debt-Product Financing Arrangements – Overview & Background”.

2) The specific citation addressing the recognition of a product financing arrangement is “FASB ASC 470-40-25-1: Debt-Product Financing Arrangements –Recognition”.

3) The appropriate accounting treatment for such an arrangement would be the Sponsor recording a liability at the time of receipt of the proceedings by the other party. Such a transaction should not be recorded as a sale by the Sponsor and the item must remain in the inventory. The excess amount paid to repurchase the item represents financing and holding costs. These costs are recorded in accordance with the accounting policies of the sponsor that are applicable to other financing and holding costs.

4.

Journal entry to record cash receipts (Sale)

Particulars

Debit

Credit

Cash

160000

Liability (Product Financing Arrangement)

160000

Journal entry to record repurchase

Particulars

Debit

Credit

Liability (Product Financing Arrangement)

160000

Holding & Financing Cost

4000

Cash

164000

Journal entry to record cash receipts (Sale)

Particulars

Debit

Credit

Cash

160000

Liability (Product Financing Arrangement)

160000

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