Company G is America's largest manufacturer of both commercial and residential lawn mowing equipment. Company has...

Company G is America's largest manufacturer of both commercial and residential lawn mowing equipment. Company has relied on comanpy B and company C (2 diffenrent vendors) to supply engines for the mowers. Company A views B & C as qualified and would chooses based on the availibility and pricing. Past year they purchased 80% from B and 20% from C.

Company C aqcuired another engine company to increase its economies of scale. Later that year becasue of the possible enhanced price competition from the combined C and new company, Company B appreached company A with this offer:

-In exchange for A granting B an exclusive supply agreement for the next 2 years, B will pay A $1,00,000 in cash or other consideration

-Pricing for engine parts for the 2 year deal will be at best available - (no other customer of B will recieve a better price on teh engine during the term of this agreement)

-the cash or other consideration given would be irrevocable

- the offer will expire in 10 days of being offered

the day before experation Co. A accepts and for tax reasons requeswted teh Co. B issue a credit memo as consideration for the exclusivity agreement instead of cash. Co. B agrees and the following terms were included in the signed agreement

-a credit memo for 1,000,000 will be granted to Co. A

- Co. A may only apply credit memo to future purchases

Co A anticipates that purchases of engine parts will result in full application of teh credit memo within 30 days

Since the exclusive suopply agreemient states that the credit memo when issued is irrevocable Co. A concluded after meeting with outside counsil that there were no circumstances, even noncompliance with the termws of the exclusive supply agreement where Co. B could refuse to honor the credit memo. in the even of noncomplience with the terms of the agreement by Co. A however, Co B could choose to discontinue the best price offer

SHOULD THE CREDIT MEMO BE TREATED AS INCOME OR AN ADJUSTMENT OF INVENTORY COST????

WHEN SHOULD THE INCOME/INVENTORY ADJUSTMENT BE RECOGNIZED???

PLEASE EXPLAIN !!!!!!!!!

Expert Solution

ekkarill92 answered 2 years ago

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