Essay on Buck's Delimma

1051 Words Mar 23rd, 2016 5 Pages
MEMORANDUM

FROM:
TO:
SUBJECT: Case 1, Buck’s Dilemma: Gross or Net?
DATE: January 16, 2016

KEY FACTS
Buck’s Hunting Equipment Inc. (“Buck”) is a retail business based in Pittsburgh, PA. During Buck’s expansion into West Virginia and southern Ohio, it entered into a three-year revolving line of credit (the “Facility”) with its bank on January 1, 2015. Specific facts and circumstances are as followed:
• The line of credit has a maximum borrowing capacity of $100 million, and under the terms of the agreement, all draws are considered to be due on demand.
• On July 15, 2015, Buck drew $60 million on the Facility.
• On August 30, 2015, Buck drew an additional $40 million on the Facility.
• On September 30, 2015, Buck paid down the draws
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Net or Gross under GAAP
Under US GAAP, the borrowing and payment activity under Facility are qualified for being presented on a net basis on the statement of cash flows, but Buck could use gross basis if it opts to.

According to ASC 230-45-10-8, “For certain items, the turnover is quick, the amounts are large, and the maturities are short. … Only the net changes during the period in assets and liabilities with those characteristics need be reported because knowledge of the gross cash receipts and payments related to them may not be necessary to understand the entity's operating, investing, and financing activities.” The fact states that the volume of transaction is considered to be large, hence, we can assume the turnover is quick. Because the dollar amounts of these transactions in this scenario are in millions, they are considered to be large.

In order to determine whether the maturities are short, we found in ASC 230-45-10-9 that, “providing that the original maturity of the asset or liability is three months or less, cash receipts and payments pertaining to any of the following qualify for net reporting ... amounts due on demand are considered to have maturities of three months or less.” Because all draws are due on demand, the maturities for these two draws are considered to be three months or less.

Therefore, all three requirements in ASC 230-45-10-8 are met, and Buck’s borrowing and payment activity under the

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