CCI conducted a strategic review of its product lines during the fourth quarter. In conjunction with thisit found $ 8 million (at book value) of an older model hard drive in the back of the warehouse. Newerinventory had been placed over in front of the old inventory and the older model had not been shipped on atimely basis. New models are now faster and more reliable. CCI was close to closing a deal with a traditionalcustomer to sell the inventory for $5.5 million when management found a third party broker, SterlingVendors, which specialized in structuring transactions in which companies are able to exchange excessmerchandise for much needed goods and services. CCI decided to accept an offer on June 25, 2016 inwhich Sterling Vendors would pay CCI $9 million for its outdated inventory.
Payment was received by CCI in the form of $9 million in service credit, redeemable by CCI for a variety ofservices performed by other clients of Sterling such as office cleaning, waste disposal, and even credits at amajor hotel chain that could be used for business travel. For example, credits at a major hotel chain or airtravel could be booked at the motel chains or airline’s published rate at the time the travel is booked. Note:the published fares represent fares that are posted in hotel rooms or maximum coach fare for air travel. Theservice credits cannot be converted to cash and should not be considered cash equivalents, and do not havean expiration date.
Required:
a. Prepare a one page memo for Susan Madigan explaining the appropriateaccounting treatment for the sale of inventory to Sterling Vendors. Your memo shouldinclude a journal entry to book the transaction as of June 25, 2016 with supportinglogic.
b. Separately address whether it may be possible to reach different conclusionsabout the appropriate financial accounting for this transaction.
c. If it is possible that there are different conclusions, does this mean that oneconclusion is correct and that the others are wrong? If not, is one opinion better thanthe others? As you go down this later path, explain what you mean by a betterconclusion.
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