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The Jaecke Group, Inc., manufactures various kinds of hydraulic pumps. In June 2011, the company signed a four-year purchase agreement with one of its main parts suppliers, Hydraulics, Inc. Over the four-year period, Jaecke has agreed to purchase 100,000 units of a key component used in the manufacture of its pumps. The agreement allows Jaecke to purchase the component at a price lower than the prevailing market price at the time of purchase. As part of the agreement, Jaecke will lend Hydraulics $200,000 to be repaid after four years with no stated interest (the prevailing market rate of interest for a loan of this type is 10%).
Jaecke's chief accountant has proposed recording the note receivable at $200,000. The parts inventory purchase from Hydraulics over the next four years will then be recorded at the actual prices paid.
Required:
Do you agree with the accountant's valuation of the note and his intention to value the parts inventory acquired over the four-year period of the agreement at actual prices paid? If not, how would you account for the initial transaction and the subsequent inventory purchases?
What is the net realizable value of the accounts receivable at December 31,2013?
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