Reference no: EM132544455

Question - Long term Liability

The Jack Group manufactures various kinds of hydraulic pumps. In June 2, the company signed a four year purchase agreement with one of its main parts suppliers, Hydraulics Ltd. Over the four year period, Jack has agreed to purchase 100,000 units of key component used in the manufacture of its pumps. The agreement allows Jack to purchase the component at a price lower than the prevailing market price at the time of purchase. As part of the agreement, Jack will lend Hydraulics 200,000 to be repaid after four years with no stated interest (the prevailing market price of interest for a loan of this type is 10%)

Jack'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? Defend your answer by using accounting principles and concepts learned. If you do not agree with the accountant, how would you account for the initial transaction and the subsequent purchase of inventory?