Answer
An arrangement whereby a company transfers its inventory to another entity. The transfer includes an agreement that explicitly or implicitly provides that the transferring company will repurchase the inventory at a particular time and for a particular price.
The transferring company retains all the control relating to the transferred inventory. The transfer means that the transferring company will avoid paying property taxes associated with the inventory. Consequently, the current liabilities associated with the inventory are temporarily removed from the transferring entity's balance sheet. Moreover, the entity's income is manipulated for the duration that the inventory is parked in the other entity's balance sheet.
The transferring company is required to record the transferred inventory and associated liabilities in its financial statements because it is the owner of the transferred assets/inventories.
Work Step by Step
An arrangement whereby a company transfers its inventory to another entity. The transfer includes an agreement that explicitly or implicitly provides that the transferring company will repurchase the inventory at a particular time and for a particular price.
The transferring company retains all the control relating to the transferred inventory. The transfer means that the transferring company will avoid paying property taxes associated with the inventory. Consequently, the current liabilities associated with the inventory are temporarily removed from the transferring entity's balance sheet. Moreover, the entity's income is manipulated for the duration that the inventory is parked in the other entity's balance sheet.
The transferring company is required to record the transferred inventory and associated liabilities in its financial statements because it is the owner of the transferred assets/inventories.
