Case 04-8: DrugKing Page 2 Example 3 DrugKing transfers two financial assets, its trade receivables and its credit card receivables, to Insure All, a substantive third party. Neither asset is readily obtainable in the marketplace. The trade receivables have a fair value of $100 (book value is $99) and were transferred to Insure All for $103. The transfer includes an option for Insure All to put the assets back to DrugKing for up to one year after the transfer date at $102.50. The transfer price of $103 represents the fair values of the trade receivables ($100) and the put option ($3). The credit card receivables have a fair value of $100 (book value is $99) and were transferred to InsureAll for $150. The transfer includes an option, which expires in 10 days, for InsureAll to put the assets back to DrugKing at $151. The possibility of the fair value of the asset increasing to $151 in 10 days is considered remote and, therefore, the exercise price of the option appears to be sufficiently favorable such that it is probable at inception that it will be exercised. The transfer price of $150 represents the fair values of the credit card receivables ($100) and the put option ($50). Outside counsel for DrugKing concludes that both transfers isolate the transferred assets (i.e., the assets have been put presumptively beyond the reach of DrugKing and its creditors, even in bankruptcy or other receivership). Required: How should DrugKing account for each of the asset transfers in the examples above (i.e., may the asset transfers be accounted for as a sale)? Case 04-8: DrugKing Page 2 Example 3 DrugKing transfers two financial assets, its trade receivables and its credit card receivables, to Insure All, a substantive third party. Neither asset is readily obtainable in the marketplace. The trade receivables have a fair value of $100 (book value is $99) and were transferred to Insure All for $103. The transfer includes an option for Insure All to put the assets back to DrugKing for up to one year after the transfer date at $102.50. The transfer price of $103 represents the fair values of the trade receivables ($100) and the put option ($3). The credit card receivables have a fair value of $100 (book value is $99) and were transferred to InsureAll for $150. The transfer includes an option, which expires in 10 days, for InsureAll to put the assets back to DrugKing at $151. The possibility of the fair value of the asset increasing to $151 in 10 days is considered remote and, therefore, the exercise price of the option appears to be sufficiently favorable such that it is probable at inception that it will be exercised. The transfer price of $150 represents the fair values of the credit card receivables ($100) and the put option ($50). Outside counsel for DrugKing concludes that both transfers isolate the transferred assets (i.e., the assets have been put presumptively beyond the reach of DrugKing and its creditors, even in bankruptcy or other receivership). Required: How should DrugKing account for each of the asset transfers in the examples above (i.e., may the asset transfers be accounted for as a sale)