Question

Payment in kind

Focus has ‘purchased’ some raw materials from a supplier which would normally have a market price of £32,000. However, the supplier has requested that the goods should not be paid for in cash but that Focus should do some metal cutting, on behalf of the supplier, at no charge. The charge that would have been made for the metal cutting in a normal market situation is about the same as the cost of the materials so Focus plc has agreed. The metal cutting will take place in January 20X7.

The accountant doesn’t propose showing anything to do with this agreement in the accounts because no cash will actually change hands.

State whether you agree with the accountant’s proposal regarding the matter mentioned above. You should explain your reasons for agreeing or disagreeing and explain any alternative treatments that you believe the accountant should use.

Answer 1

The accountant is not right in his contention of not showing the inventory in his books just because no cash has been paid.

Assuming Focus follows accural basis of accounting it should record the inventory on its cost or market value.

Since in this case metal cutting services are provided against the inventory therefore inventory should be debited and the services provided should be credited.

The value should be the market value of the assets received if that is not available then market value of assets or services rendered shall be taken or if that is also missing then book value or cost of assets or services rendered shall be taken.

Since in this case Market value of inventory in shiven that shall only be recorded.

And at year end it can be impaired if NRV falls down.

Hope this helps.

All the best ?