Intermediate Accounting

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 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, 2016, 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
providing financing. I already checked with Harbaugh’s controller and
he has agreed to the arrangement. Not only will 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.

 

  1. Obtain the relevant authoritative literature on product financing arrangements using the FASB Accounting Standards Codification. You might gain access at the FASB website (asc.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. Eagleton.
  4. Prepare the journal entry for Balboa Lumber to record the “sale” of the inventory and subsequent repurchase.

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