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Question - Birch Industries has borrowed the maximum amount available from its bank to finance the purchase of inventory under a short-term line of credit. The CFO and your boss, Susie Perkins takes you to lunch to explain a strategy called a product financing arrangement that would enable Birch Industries to obtain the necessary cash to purchase additional supplies of merchandise. Susie believes it is an ideal way to structure a transaction to meet Birch Industries financial needs. On April 1, 2015, the first day of the company's second quarter, Susie plans to sell $200,000 of inventory to Grime Corporation for $300,000. Susie explained that Grime will pay us immediately and then we will agree to repurchase the merchandise in two months for $300,000 plus 8%APR and an $5,000 fee for storing the inventory. Susie conveyed that she had checked with Grime's CFO and he has agreed to the arrangement, if we decide to move forward. Susie concludes that not only will we obtain the needed financing, but the second quarter pre-tax profits will increase by $95,000, the gross profit on the sale less the $5,000 storage fee.
1. As the assistant CFO, Susie has asked you to research the issue and make sure we will be following appropriate reporting standards.
2. Research the accounting issue.
3. Formulize your findings and compose a formal research memo.
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