Daniel Ltd sells one of its properties to a financing company with an attached call option,which allows Daniel Ltd to reacquire the property at a future date for $400 000.The current market value at the time of the sale is $300 000,but the financing company pays $350 000 for it.It is expected that the market value of the property will exceed $400 000 before the option expires.What is the appropriate treatment of this sale?
A) Record the revenue and make appropriate note disclosures about the call option and its associated risks.
B) Set-off the call option and the building-reporting changes in the difference between their current values as revenues or expenses as appropriate.
C) No entry would be required as the call option is off balance sheet and the building has not effectively been sold.
D) Record the inflow of cash and a liability.

Question

Quizplus · Accepted Answer

The correct treatment involves recording the inflow of cash from the sale and recognizing a liability for the call option. This is because the transaction includes a financing component (the company received more than the current market value) and the call option indicates that the company retains a form of control or interest in the property, necessitating the recognition of a liability for the potential obligation to reacquire the property.

Daniel Ltd Sells One of Its Properties to a Financing