ACCA FR · Chapter 1 · Question 5 of 10
On 1 January Kestrel Co sold inventory with a carrying amount of $1.5 million to a bank for $2 million. Kestrel Co continues to store the goods and is obliged to buy them back on 31 December of the same year for $2.2 million. How should Kestrel Co account for this transaction in the year?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Keep the inventory in the SFP, recognise a $2 million liability and charge $200,000 finance cost to profit or loss
Explanation
Applying substance over form, Kestrel Co keeps the risks and rewards of the inventory and must repurchase it at a fixed price, so the transaction is a secured loan rather than a sale. The $2 million received is recorded as a liability. The $200,000 difference between the $2.2 million repurchase price and the $2 million received is finance cost, accrued over the year. The inventory stays at its carrying amount of $1.5 million.
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