Barry Company grows and ages tobacco. On January 2, 2013, the firm has aging tobacco with a cost of $200,000 and a current market value of $300,000. Barry Company wants to use this tobacco to obtain financing. The firm uses a December 31 year-end.
a. Prepare journal entries during 2013 and 2014 for the transactions in parts (i) and (ii) below:
(1) The firm borrows $300,000 from its bank, using the tobacco inventory as collateral. The loan is repayable on December 31, 2014, with interest at 10% per year compounded annually. Assume zero storage costs. The firm expects to sell the tobacco on December 31, 2014, for $363,000.
(2) The firm sells the tobacco inventory to the bank for $300,000. It promises to sell the inventory on behalf of the bank at the end of two years and remit the proceeds to the bank.
b. Compare and contrast the income statement and balance sheet effects of these two transactions.
c. How should Barry Company structure this transaction to ensure that it qualifies as a sale instead of a collateralized loan?

Question

Barry Company grows and ages tobacco. On January 2, 2013, the firm has aging tobacco with a cost of $200,000 and a current market value of $300,000. Barry Company wants to use this tobacco to obtain financing. The firm uses a December 31 year-end. 
a.   Prepare journal entries during 2013 and 2014 for the transactions in parts (i) and (ii) below: 
(1)  The firm borrows $300,000 from its bank, using the tobacco inventory as collateral. The loan is repayable on December 31, 2014, with interest at 10% per year compounded annually. Assume zero storage costs. The firm expects to sell the tobacco on December 31, 2014, for $363,000. 
(2)  The firm sells the tobacco inventory to the bank for $300,000. It promises to sell the inventory on behalf of the bank at the end of two years and remit the proceeds to the bank. 
b.   Compare and contrast the income statement and balance sheet effects of these two transactions. 
c.   How should Barry Company structure this transaction to ensure that it qualifies as a sale instead of a collateralized loan?

Quizplus · Accepted Answer

The Answer of Barry Company grows and ages tobacco. On January 2, 2013, the firm has aging tobacco with a cost of $200,000 and a current market value of $300,000. Barry Company wants to use this tobacco to obtain financing. The firm uses a December 31 year-end. 
a.   Prepare journal entries during 2013 and 2014 for the transactions in parts (i) and (ii) below: 
(1)  The firm borrows $300,000 from its bank, using the tobacco inventory as collateral. The loan is repayable on December 31, 2014, with interest at 10% per year compounded annually. Assume zero storage costs. The firm expects to sell the tobacco on December 31, 2014, for $363,000. 
(2)  The firm sells the tobacco inventory to the bank for $300,000. It promises to sell the inventory on behalf of the bank at the end of two years and remit the proceeds to the bank. 
b.   Compare and contrast the income statement and balance sheet effects of these two transactions. 
c.   How should Barry Company structure this transaction to ensure that it qualifies as a sale instead of a collateralized loan?

Barry Company Grows and Ages Tobacco