Question

Please explain for two below question

36.During 2014 Carne Corporation transferred inventory to Nolan Corporation and agreed to repurchase the merchandise early in 2015. Nolan then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Carne. In 2015 when Carne repurchased the inventory, Nolan used the proceeds to repay its bank loan.

Question : On whose books should the cost of the inventory appear at the December 31, 2014balance sheet date?

a.Carne Corporation

b.Nolan Corporation

c.Norwalk Bank

d.Nolan Corporation, with Carne making appropriate note disclosure of the transaction

40. If the beginning inventory for 2014 is overstated, the effects of this error on cost of goods sold for 2014, net income for 2014, and assets at December 31, 2015, respectively, are

a.overstatement, understatement, overstatement.

b.overstatement, understatement, no effect.

c.understatement, overstatement, overstatement.

d.understatement, overstatement, no effect.

Answer 1

36. Answer is option A Carne Corporation

The whole arrangement involving Carne corporation, Nolan corporation and Norwalk bank is known as the product financing arrangement. The cost inventory will be recorded by Carne corporation because goods are temporarily transferred to Nolan corporation to handle financial requirements. Goods will be back in Carne corporation after short period.

40. Answer is option A Overstatement, understatement, overstatement.

Cost of goods sold = beginning inventory + purchase of inventory - ending inventory (thus it will be unnecessarily high)

Net income = sales-cost of goods sold (thus it will be unnecessary low)

In assets, the value of inventory will be high beginning inventory