Goods are sold to a customer who has the right to require the seller to buy them back at the original price plus 10% after one year. Which concept leads the seller to treat the transaction as a secured loan rather than a sale?
Answer and explanation
Correct answer: C. Substance over form
- Step 1: The seller keeps the risks and rewards because it must repurchase at a fixed price.
- Step 2: The legal form is a sale but the economic reality is borrowing against goods.
- Step 3: Faithful representation requires reporting that substance, which is substance over form.
Answer
Substance over form.
Why not the others: Prudence concerns caution in uncertainty, not looking through the legal form of a contract. Comparability concerns consistency between periods, not the nature of this contract. Materiality is not the reason; the repurchase obligation is significant to the nature of the transaction.
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