How do each of the following special situations affect when items are recorded goods sold (and...

How do each of the following special situations affect when items are recorded goods sold (and sales)?

a) Sales with repurchase agreements

b) Sales with high rates of returns

Solutions

Expert Solution

a)Sales with repurchase or buy back agreements are often recorded as Loan and not as sale and Difference between Initial selling price and buyback or repurchase price if any is treated as Finance Charges and not as profit because it was not actually a sale (effecting transfer of risks and rewards )in the first place.

No risk and rewards is transferred to the buyer and hence sale doesnot take place .It is just like holding goods for a certain period for some charges by the buyer and Seller has all rights to repurchase as and when he wants it back.So goods sold is not recorded as sale

b) Sale with high rates of returns

Sale is recognised irrespective of high sales return rate as risks and rewards of Ownership is transferred to the buyer provided the seller estimates a reasonable assurance of realisation of funds and if uncertainity prevails in realisation of funds then provision needs to be made as per past experiences of percentage of sales returns

In this case sale is recognised and also a liability is created based on previous experiences of returns.

ekkarill92 answered 9 months ago

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