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Question 5Q

Intermediate Accounting (Kieso)
Found in: Page 421

Short Answer

What is a repurchase agreement (product financing) arrangement? How should a product repurchase agreement be reported in the financial statements?

In a repurchase agreement title is transferred to the buyer with the implicit or explicit contract to regain it. Thus inventories would not be shown in the financial statement until repurchased.

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Step by Step Solution

Repurchase agreement

A repurchase agreement is a sales arrangement in which inventories are sold (transfer) with implicit or explicit agreement to purchase again.

A repurchase agreement is a kind of product financing as money is obtained without reporting any liability or inventory on the balance sheet.

Reporting of repurchase agreement

In a product repurchase agreement, the title of the goods is technically transferred to the other party, but the seller retains the control by making a repurchase agreement.

So for transferring the title, the goods or inventory would not be shown in the seller's balance sheet, and the cash balance would increase. However, when the goods were repurchased, they would be added to the balance sheet, decreasing the cash balance.

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