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Chapter 8: Question 5Q (page 421)

What is a repurchase agreement (product financing) arrangement? How should a product repurchase agreement be reported in the financial statements?

Short Answer

Expert verified

In a repurchase agreement title is transferred to the buyer with the implicit or explicit contract to regain it. Thus inventories would not be shown in the financial statement until repurchased.

Step by step solution

01

Repurchase agreement

A repurchase agreement is a sales arrangement in which inventories are sold (transfer) with implicit or explicit agreement to purchase again.

A repurchase agreement is a kind of product financing as money is obtained without reporting any liability or inventory on the balance sheet.

02

Reporting of repurchase agreement

In a product repurchase agreement, the title of the goods is technically transferred to the other party, but the seller retains the control by making a repurchase agreement.

So for transferring the title, the goods or inventory would not be shown in the seller's balance sheet, and the cash balance would increase. However, when the goods were repurchased, they would be added to the balance sheet, decreasing the cash balance.

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Most popular questions from this chapter

Accounting, Analysis, and Principles

Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residentialswimming pools. The following inventory data is available for the month of March.

Price per

Units Unit Total

Residential Pumps

Inventory at Feb. 28: 200 \( 400 \) 80,000

Purchases:

March 10 500 \( 450 \)225,000

March 20 400 \( 475 \)190,000

March 30 300 \( 500 \)150,000

Sales:

March 15 500 \( 540 \)270,000

March 25 400 \( 570 \)228,000

Inventory at March 31: 500

Commercial Pumps

Inventory at Feb. 28: 600 \( 800 \)480,000

Purchases:

March 3 600 \( 900 \)540,000

March 12 300 \( 950 \)285,000

March 21 500 \(1,000 \)500,000

Sales:

March 18 900 \(1,080 \)972,000

March 29 600 \(1,140 \)684,000

Inventory at March 31: 500

Accounting

(a) Assuming Englehart uses a periodic inventory system, determine the cost of inventory on hand at March 31 and thecost of goods sold for March under first-in, first-out (FIFO).

(b) Assume Englehart uses dollar-value LIFO and one pool, consisting of the combination of residential and commercialpumps. Determine the cost of inventory on hand at March 31 and the cost of goods sold for March. Assume Englehart鈥檚initial adoption of LIFO is on March 1. Use the double-extension method to determine the appropriate price indices.

(Hint:The price index for February 28/March 1 should be 1.00.) (Round the index to three decimal places.)

Analysis

(a) Assume you need to compute a current ratio for Englehart. Which inventory method (FIFO or dollar-value LIFO) doyou think would give you a more meaningful current ratio?

(b) Some of Englehart鈥檚 competitors use LIFO inventory costing and some use FIFO. How can an analyst compare theresults of companies in an industry, when some use LIFO and others use FIFO?

Principles

Can companies change from one inventory accounting method to another? If a company changes to an inventory accounting methodused by most of its competitors, what are the trade-offs in terms of the conceptual framework discussed in Chapter 2 of the textbook?

Question:Where, if at all, should the following items be classified on a balance sheet?

(a) Goods out on approval to customers.

(b) Goods in transit that were recently purchased f.o.b. destination.

(c) Land held by a realty firm for sale.

(d) Raw materials.

(e) Goods received on consignment.

(f) Manufacturing supplies.

At December 31, 2016, Stacy McGill Corporation reported current assets of \(370,000 and current liabilities of \)200,000. The following items may have been recorded incorrectly.

1. Goods purchased costing \(22,000 were shipped f.o.b. shipping point by a supplier on December 28. McGill received andrecorded the invoice on December 29, 2016, but the goods were not included in McGill鈥檚 physical count of inventorybecause they were not received until January 4, 2017.

2. Goods purchased costing \)15,000 were shipped f.o.b. destination by a supplier on December 26. McGill received andrecorded the invoice on December 31, but the goods were not included in McGill鈥檚 2016 physical count of inventorybecause they were not received until January 2, 2017.

3. Goods held on consignment from Claudia Kishi Company were included in McGill鈥檚 December 31, 2016, physical countof inventory at \(13,000.

4. Freight-in of \)3,000 was debited to advertising expense on December 28, 2016.

Instructions

(a) Compute the current ratio based on McGill鈥檚 balance sheet.

(b) Recompute the current ratio after corrections are made.

(c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections?

Question: Craig Company asks you to review its December 31, 2017, inventory values and prepare the necessary adjustments to the books. The following information is given to you.

1. Craig uses the periodic method of recording inventory. A physical count reveals \(234,890 of inventory on hand at December 31, 2017.

2. Not included in the physical count of inventory is \)13,420 of merchandise purchased on December 15 from Browser. This merchandise was shipped f.o.b. shipping point on December 29 and arrived in January. The invoice arrived and was recorded on December 31.

3. Included in inventory is merchandise sold to Champy on December 30, f.o.b. destination. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale on account for \(12,800 on December 31. The merchandise cost \)7,350, and Champy received it on January 3.

4. Included in inventory was merchandise received from Dudley on December 31 with an invoice price of \(15,630. The merchandise was shipped f.o.b. destination. The invoice, which has not yet arrived, has not been recorded.

5. Not included in inventory is \)8,540 of merchandise purchased from Glowser Industries. This merchandise was received on December 31 after the inventory had been counted. The invoice was received and recorded on December 30.

6. Included in inventory was \(10,438 of inventory held by Craig on consignment from Jackel Industries.

7. Included in inventory is merchandise sold to Kemp f.o.b. shipping point. This merchandise was shipped on December 31 after it was counted. The invoice was prepared and recorded as a sale for \)18,900 on December 31. The cost of this merchandise was \(10,520, and Kemp received the merchandise on January 5.

8. Excluded from inventory was a carton labeled 鈥淧lease accept for credit.鈥� This carton contains merchandise costing \)1,500 which had been sold to a customer for $2,600. No entry had been made to the books to reflect the return, but none of the returned merchandise seemed damaged; Craig will honor the return.

Instructions

(a) Determine the proper inventory balance for Craig Company at December 31, 2017.

(b) Prepare any correcting entries to adjust inventory to its proper amount at December 31, 2017. Assume the books have not been closed.

Question:In your audit of Jose Oliva Company, you find that a physical inventory on December 31, 2017, showed merchandise with a cost of \(441,000 was on hand at that date. You also discover the followingitems were all excluded from the \)441,000.

1. Merchandise of \(61,000 which is held by Oliva on consignment. The consignor is the Max Suzuki Company.

2. Merchandise costing \)38,000 which was shipped by Oliva f.o.b. destination to a customer on December 31, 2017. The customerwas expected to receive the merchandise on January 6, 2018.

3. Merchandise costing \(46,000 which was shipped by Oliva f.o.b. shipping point to a customer on December 29, 2017. Thecustomer was scheduled to receive the merchandise on January 2, 2018.

4. Merchandise costing \)83,000 shipped by a vendor f.o.b. destination on December 30, 2017, and received by Oliva on January4, 2018.

5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December 31, 2017, and received by Oliva onJanuary 5, 2018.

Instructions

Based on the above information, calculate the amount that should appear on Oliva鈥檚 balance sheet at December 31, 2017, for inventory.
See all solutions

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