The Jaecke Group, Inc., manufactures various kinds of hydraulic pumps. In June 2011, the company signed a four-year purchase agreement with one of its main parts suppliers, Hydraulics, Inc. Over the four-year period, Jaecke has agreed to purchase 100,000 units of a key component used in the manufacture of its pumps. The agreement allows Jaecke to purchase the component at a price lower than the prevailing market price at the time of purchase. As part of the agreement, Jaecke will lend Hydraulics $200,000 to be repaid after four years with no stated interest (the prevailing market rate of interest for a loan of this type is 10%).
Jaecke's chief accountant has proposed recording the note receivable at $200,000. The parts inventory purchase from Hydraulics over the next four years will then be recorded at the actual prices paid.
Required:
Do you agree with the accountant's valuation of the note and his intention to value the parts inventory acquired over the four-year period of the agreement at actual prices paid? If not, how would you account for the initial transaction and the subsequent inventory purchases?