On January 1, year 1, Miller Corporation promises to “unconditionally” transfer a building that cost $100,000 (appraised recently at $300,000) to Valerie Company on January 1, year 2 for a boat she bo

Accounting (Case Study)

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Accounting (Case Study)

When an entity promises to do an “unconditionally” transfer of either cash or any other asset to another entity, the transaction is referred to as a contribution transaction. However, according to FASB ASC 958-605, before settlement, the “unconditionally” transfer remains a pledge (Wild, Shaw and Chiappetta, 2015). In accounting, the receiver of the pledge records the total pledge amount as revenue or as account receivable. To the promising entity, the transaction is recorded as accounts payable. In the context of Valerie and Miller, Miller Corporation shall record the pledge transaction as accounts payable amount $100,000, done on January 1, year 1, and the transaction details will be narrated as building appraised at $300,000. On the other hand, Valerie Company will record the transaction as an account receivable amount $100,000, done on January 1, year 1, and the transaction details shall be narrated as building valued at $300,000.

The transactions done between Miller Corporation and Valerie company on January 1, year 2 is also pledge, which will be recorded as accounts payable by the company doing the pledge and as accounts receivable by the company given the pledge. Thus, in the context of Valerie and Miller, Valerie company received a pledge for a boat bought by Miller for $250,000; therefore will record the transaction as an account receivable amount of $250,000. For Miller corporation, the transaction shall be recorded as an account payable amount of $250,000.

When a pledge is fulfilled, the entity receiving the pledge record the total amount of the pledge as revenue, while the entity that fulfilled the pledge records the transaction as an expenditure. It is important to note that a pledge is fulfilled when there is a transfer of title to the other party (Kumar and Sharma, 2015). In the content of Valerie and Miller on December 31, year 2, only the boat title had been transferred while the building had not yet been transferred. Thus, to Valerie company, the boat transaction shall be recorded as a revenue amount of $250,000, while to Miller Corporation, the transaction shall be recorded as an expenditure amount of $250,000. The pledge transaction on the building shall remain account payable to Miller corporation and amount receivable to Valerie since the transfer is not complete.

Reference

Wild, J. J., Shaw, K. W., & Chiappetta, B. (2015). Fundamental accounting principles. McGraw-Hill Education,.

Kumar, R., & Sharma, V. (2015). Auditing: Principles and practice. PHI Learning Pvt. Ltd..