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Megan C
Megan C , Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16539
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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A vendor becomes an investor in a customers company by reducing

Resolved Question:

A vendor becomes an investor in a customer's company by reducing the customer's balance owed to the vendor for a share of the company. How is this recorded? What happens to the value of the inventory purchased but not paid for
Submitted: 3 years ago.
Category: Finance
Expert:  Megan C replied 3 years ago.

MyVirtualCPA :

To record this transaction, you would debit accounts payable and credit income

MyVirtualCPA :

you would do nothing for the cost of the inventory purchased but not paid for -it would remain in inventory at cost

Customer:

why would this not be credited to paid in capital as the vendor's portion of the investment

MyVirtualCPA :

yes, that is correct if they have ownership interest that is what would happen

Customer:

Then the inventory would remain at the original cost and if the item was sold to a customer below the value as originally recorded, then a loss would be incurred?

MyVirtualCPA :

Correct.

Customer:

Is there any way to prevent showing a loss?

MyVirtualCPA :

You would prevent showing a loss by selling the inventory above cost

MyVirtualCPA :

Even if you de-valued the inventory, you would still show a loss


 

Customer:

That made me laugh. I thought that was how it would have to be, but wanted a second opinion before presenting this.

Customer:

Thank you for your help.

MyVirtualCPA :

You're welcome. Glad I could give you a laugh :-)

MyVirtualCPA :

If there's nothing else I can help you with please take a moment to rate my response as "excellent" so that I may receive credit for assisting you today

Customer:

One more thing.

MyVirtualCPA :

Okay

Customer:

At year end, this investment would be viewed as any other investor in the LLC who actually paid cash, correct. Meaning whatever value this reduction in debt had, would define the vendor's portion of income.

MyVirtualCPA :

Correct

Customer:

ok, thanks. I appreciate your time.

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