Pepper Ltd. delivers 500 units of product to Salt Corp. The sales price was $125 per unit, and Pepper’s cost was $75 per unit. Pepper

Pepper Ltd. delivers 500 units of product to Salt Corp. The sales price was $125 per unit, and Pepper’s cost was $75 per unit. Pepper has agreed that Salt may return any unused product within 60 days and receive a full refund. Based on historical experience with Salt, Pepper estimates that 10% of the units will be returned, but Pepper will be able to resell any returned units.

Required:

1. What is the value of the right to recovery asset?

2. What value would you assign to the right to recovery asset if the units would have to be sold at a reduced price of $40 per unit?

3. How is a right to recovery asset different from inventory?

Expert Solution

Requirement 1

50 units (500 units x 10%) x $75 cost = $3,750

Requirement 2

50 units (500 units x 10%) x $40 realizable value = $2,000

Requirement 3

A right to recovery asset is not typical inventory because it has been transferred to the customer, who may or may not keep it.

Junaid answered 1 year ago

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