A-1) Provide the debits and credits for North Face's accounting of the first, $7.8 million transaction. Be certain to include the inventory component.

A-3) You are the auditor. Determine if NF correctly recorded the transaction referenced in A-1. If you determine they were not correct with the entry, how would you have recorded the transaction (not an AJE, the original transaction)? Provide the debits and credits. Assume for this question the recorded cost of the inventory in the transaction is $12.0 million

In December 1997, North Face began negotiating a large transaction with a barter company. Under the terms of this transaction, the barter company would purchase $7.8 million of excess inventory North Face had on hand near the end of fiscal 1997. In exchange for that inventory, North Face would receive $7.8 million of trade credits that were redeemable only through the barter company. Historically, companies have used such trade credits to purchase advertising or travel services. Before North Face finalized the larger barter transaction, Christopher Crawford, the company's chief financial officer, asked North Face's independent auditors how to account for the transaction. The auditors referred Crawford to the appropriate authoritative literature for nonmonetary exchanges. That literature generally precludes companies from recognizing revenue on barter transactions when the only consideration received by the seller is trade credits. To circumvent the authoritative literature, Crawford restricted the transaction. The final agreement with the barter company included an oral "side agreement" that was concealed from North Face's independent auditors. Crawford, however, structured the transaction to recognize a profit on the trade credits. First, he required the barter company to pay a portion of the trade credits in cash. Crawford agreed that The North Face would guarantee that the barter company would receive at least 60 percent recovery of the total purchase price when it resold the product. In exchange for the guarantee, the barter company agreed to pay approximately 50 percent of the total purchase price in case and the rest in trade credits. This guarantee took the form of an oral side agreement that was not disclosed to the auditors. To further obscure the true nature of the large barter transaction, Crawford split it into two parts. On 29 December 1997, two days before the end of North Face's fiscal 1997 fourth quarter, Crawford recorded a $5.15 million sale to the barter company. For this portion of the barter deal, North Face received $3.51 million in cash and trade credits of $1.64 million. Ten days later, during North Face's first quarter of fiscal 1998, the company's accounting staff booked the remaining $2.65 million portion of the barter transaction. North Face received only trade credits from the barter company for this final portion of the $7.8 million transaction. North Face recognized its normal profit margin on each segment of the barter transaction.