Balboa Lumber Case

| Balboa Lumber |

Memo

To: | Alfred Eagleton |

From: | Ruby Roberts |

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Date: | December 10, 2014

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Re: | Research Case 8-11 |

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After researching the Balboa Lumber’s transaction involving the sale of inventory with a plan to repurchase, I have determined that the following would be the proper way to treat this transaction. The appropriate treatment of the sale of inventory with intention to provide financing and an agreement to repurchase the merchandise in the future would be to treat the transaction as a product financing agreement. A product financing agreement is a transaction in which an entity sells and agrees to repurchase inventory with the repurchase price equal to the original sale price plus carrying and financing costs (FASB glossary). This subtopic requires that a product financing arrangement be accounted for as a borrowing rather than as a sale (470-40-25-1). If a sponsor sells a product to another entity and, in a related transaction, agrees to repurchase the product, the sponsor shall record a liability at the time the proceeds are received from the other entity to the extent that the product is covered by the financing arrangement (470-40-25-2a). Costs of the product, excluding processing costs, in excess of the sponsor’s original production or purchase costs of the other entity’s purchase costs represent financing and holding costs (470-40-25-3). In the product financing arrangement, both of the characteristics in paragraphs 470-40-15-2 through 15-3 are present; accordingly, the sponsor neither records the transaction as a sale of inventory nor removes the inventory from its balance sheet. The sponsor recognizes a liability when the proceeds are received for the other entity. Financing and holding costs are accrued by the sponsor as incurred by the other entity and accounted for in accordance with the sponsor’s accounting policies for such costs. Interest costs are separately identified and accounted for in accordance...