Using inventory to achieve off-balance-sheet financing. P. J. Lorimar Company grows and ages tobacco. On January 2, Year 5, the firm has aging tobacco with a cost of \(\$ 200,000\) and a current market value of \(\$ 300,000\). P. J. Lorimar Company wants to use this tobacco to obtain financing. The firm uses a December 31 year-end.

a. Prepare journal entries during Year 5 and Year 6 for the transactions in parts (i) and (ii) below:

(i) The firm borrows \(\$ 300,000\) from its bank, using the tobacco inventory as collateral. The loan is repayable on December 31, Year 6, with interest at 10 percent per year compounded annually. Assume zero storage costs. The firm expects to sell the tobacco on December 31, Year 6, for \(\$ 363,000\).

(ii) The firm sells the tobacco inventory to the bank for \(\$ 300,000\). It promises to sell the inventory on behalf of the bank at the end of two years and remit the proceeds to the bank.

b. Compare and contrast the income statement and balance sheet effects of these two transactions

c. How should P. J. Lorimar Company attempt to structure this transaction to ensure that it qualifies as a sale instead of a collateralized loan?