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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

Presented below are transactions related to Tom Brokaw, Inc.

May 10 Purchased goods billed at \(15,000 subject to cash discount terms of 2/10, n/60.

11 Purchased goods billed at \)13,200 subject to terms of 1/15, n/30.

19 Paid invoice of May 10.

24 Purchased goods billed at $11,500 subject to cash discount terms of 2/10, n/30.

Instructions

(a) Prepare general journal entries for the transactions above under the assumption that purchases are to be recorded at net amounts after cash discounts and that discounts lost are to be treated as financial expense.

(b) Assuming no purchase or payment transactions other than those given above, prepare the adjusting entry required on May 31 if financial statements are to be prepared as of that date.

Describe the LIFO double-extension method. Using the following information, compute the index at December 31, 2017, applying the double-extension method to a LIFO pool consisting of 25,500 units of product A and 10,350 units of product B. The base-year cost of product A is \(10.20 and of product B is \)37.00. The price at December 31, 2017, for product A is \(21.00 and for product B is \)45.60. (Round to two decimal places.)

Shania Twain Company was formed on December 1, 2016. The following information is available from Twain’s inventory records for Product BAP.

Units Unit Cost

January 1, 2017 (beginning inventory) 600 $ 8.00

Purchases:

January 5, 2017 1,200 9.00

January 25, 2017 1,300 10.00

February 16, 2017 800 11.00

March 26, 2017 600 12.00

A physical inventory on March 31, 2017, shows 1,600 units on hand.

Instructions

Prepare schedules to compute the ending inventory at March 31, 2017, under each of the following inventory methods.

(a) FIFO (b) LIFO. (c) Weighted-average (round unit costs to two decimal places).

Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use.

1. An invoice for \(8,100, terms f.o.b. destination, was received and entered January 2, 2017. The receiving report shows that the materials were received December 28, 2016.

2. Materials costing \)28,000, shipped f.o.b. destination, were not entered by December 31, 2016, “because they were in a railroad car on the company’s siding on that date and had not been unloaded.”

3. Materials costing \(7,300 were returned to the supplier on December 29, 2016, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier’s place of business until January 6, 2017.

4. An invoice for \)7,500, terms f.o.b. shipping point, was received and entered December 30, 2016. The receiving report shows that the materials were received January 4, 2017, and the bill of lading shows that they were shipped January 2, 2017.

5. Materials costing $19,800 were received December 30, 2016, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2017.”

Instructions -

Prepare correcting general journal entries required at December 31, 2016, assuming that the books have not been closed.

Midori Company had ending inventory at end-of-year prices of \(100,000 at December 31, 2016; \)119,900 at December 31, 2017; and $134,560 at December 31, 2018. The year-end price indexes were 100 at 12/31/16, 110 at 12/31/17,and 116 at 12/31/18. Compute the ending inventory for Midori Company for 2016 through 2018 using the dollar-valueLIFO method.
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