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Accounting for a Rare Financed Sale Arrangement

Fair Value Hedge of a Nonfinancial Asset, Forward Sale, Something Else -- or Nothing?

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Let me start by disclosing two things:

  1. I am not an accountant by trade and have little-to-none formal training; thus, my apologies for any incorrect terminology; and
  2. The described scenario will require a certain "suspension of disbelief."  However, it is a representation (not literal) of an arrangement, accounting for which has raised questions for me. 

So, here goes the scenario:

Company A is entering the cash-delivery (a.k.a. armored-truck) business for three years.  Unaffiliated Company B is willing to get Company A going by selling it start-up assets: an armored truck (valued at $20,000) and a certain amount of cash ($80,000).  Company A is not putting up any cash, and finances the $100,000 asset purchase via a note payable to Company B.  The note matures in three years.  Upon maturity, the whole principal of $100,000 is due.  However, if Company A returns the armored truck to Company B in a functioning condition, then the cash amount of the principal due on the note is discounted to $80,000.

I am looking at this strictly from the Company A's perspective.  The basics seem straightforward: there is a cash asset of $80,000 and a non-cash asset (truck) recorded at $20,000; on the liability side, there is a note payable in the amount of $100,000.  However, what -- if anything -- needs to be recorded to reflect the "return-the-truck" arrangement?  The truck will be depreciated over three years -- and then "magically" be worth the original $20,000 at the end of the term in the form of a discount on the $100,000 note.  What is the correct interpretation of this arrangement?  A forward contract for the sale of the truck?  But the truck doesn't have be "sold" back -- it just makes economic sense to do so.  A hedge?  But the truck is not a financial asset and the arrangement does not fall under the definition of a derivative.

Am I completely overthinking this and Company A should just disregard the "return-the-truck" arrangement in its financials (at least in the numbers)?  Just depreciate the truck and book a gain on the sale when exercising the condition of the discount on the note?


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By synergytax
Aug 7th 2018 02:54

What is the real FMV of the truck?

debit vehicles 20k
debit cash 80 k
credit note payable 100k

credit vehicles 20k
debit accumulated depreciation ??
debit/credit gain/loss on disposition
credit cash 80k
debit note receivable 80k

if and when the truck gets returned, you'll have another sale for A.

Or is this a lease? then you can expense 20% of the payments as lease expense, the rest pays down the loan.

Where is the interest? There needs to be some imputed interest.

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By sjmcisaac
Aug 14th 2018 10:03

Seems the salvage value of the truck is $20,000. Purchase price - salvage value = amount to be depreciated, so no depreciation expense for the asset, unless it is determined it no longer meets the "functioning conditioning" criteria, and no gain or loss on its disposal.

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