Question

Q4. In 2016 Ice Cube, LLC started a new business whereby it sells Blue Granular Ice Melt, in 50 lbs. bags to dealers under a contract of sale or return. The contract provides that:

 ordered under the contract are not to be shipped on consignment but are to be purchased under a contract of sale or return.

 Payment is to be made promptly on request. After credit is allowed for ice melt repurchases by the taxpayer, the taxpayer will allow a discount to the dealer based on the amount due.

 Title and risk of loss to the ice melt shall pass to the dealer upon delivery by the taxpayer to a common carrier.

 The dealer may at any time, at his option, resell to the taxpayer at invoice price plus freight all or any part of the remaining ice melt.

The repurchase of the ice melt from the dealers generally occurs on or about March 21st for the territory in which the dealer is located. The bulk of the repurchases occur during the months of March and April. Ice Cube had a substantial amount of ice melt in the hands of dealers at the close of its fiscal year, March 31, which were to be repurchased since the winter in many territories had ended. The transaction is not recorded on the taxpayer's books as a sale. The only accounting entry made at that time is an entry to a memorandum account for the invoice value of the ice melt shipped. No reduction is made to the inventory account for goods shipped to the dealer. The taxpayer values the ice melt at cost for inventory purposes. Since ice melt must be in the hands of the dealers by October 1, they are usually shipped by early fall and a substantial portion are sold by the dealers prior to the close of the taxpayer's fiscal year. Thus, under the taxpayer's method of accounting, it carries in inventory goods that not only are stated to have been sold to dealers but which also have, in large measure, already been sold to the ultimate consumer. Ice Cube has retained your firm to determine the tax accounting of its sales contract. What advice can you give Ice Cube?

Answer 1

As per IAS 18, an entity can recognize a transaction as a sale if all of the following conditions are met

(1) The title and all risk and rewards passes to the buyer

(2) The entity does not retain effective control over the goods

(3) The amount of revenue and costs can be measured reliably

(4) There is no uncertainty regarding collection of receipts

At the end of fiscal if any goods are lying unsold with the buyer then that should not be considered as a sale.

Since in the case of Ice cubes LLC , as per the Sales Contract all the above conditions are met, it should have recorded the transaction as a sale at the time of delivering the goods to a common carrier by debiting the dealer a/c and crediting sales. Simultaneously it should have reduced its inventory by debiting cost of goods sold and crediting Inventory. Whenever the dealer raises an invoice on Ice Cubes LLC for the unsold inventory along with the freight charges, Ice cubes should reverse the sales by debiting the sales a/c , debiting the freight expense and crediting the dealer. Simultaneously it should take into inventory the returned stock by debiting inventory and crediting cost of goods sold. It should also value the closing inventory at the end of fiscal on the basis of cost or net realizable value which ever is lower. Also the discount which will be provided to the dealer on the basis of amount due should be recorded as an expense .

Since in the given case the tax payer has not recorded the transaction as a sale and has only made an entry to the memorandum account, it has to make sure to give effect to the above entries highlighted above. it should record all the inventory that has ben sold to the ultimate consumer as sales. It should also record the cost of inventory sold to the ultimate consumer. Then the balance inventory in the taxpayers books will reflect the unsold inventory at cost which will include the unsold inventory lying with the dealer as well. All the unsold inventory should be valued on the basis of cost or net realizable value whichever is lower. Also the freight expenses and discount allowed should be accounted by the tax payer.