Canada Inventory or Fixed assets

[cgaaccountant]

Hi everyone,

I need good reasons to convince my boss that his judgment was wrong on one of our transactions.

We are producing and selling product "A" to customers. Now we had a new project to encourage more sales.

We purchased equipment "B" from our sister companies and give away to our customers for free for 4 Years if they can meet the yearly purchase target from us. If they can't meet the target, we will have them to purchase the equipment at the end of year 4.

Now, for the equipment "B", I believe it should be treated as fixed assets and depreciate it over 4 years. But my boss wants to treat it as Inventory and charge it to COGS over the 4 years.

I originally put the depreciation in OPEX but now I'm thinking it should go above gross margin (maybe in sales discount?)

Any opinion will be appreciated. Thanks!

 

[kirby]

Being seen as spending time and effort to prove your boss wrong is not going to enhance your long term job outlook there. Just a warning.
First consideration is - is the cost of the equipment significant? If not then this is "much ado about nothing."
Next, would be what is the history of returns vs sales - but we don't know because this is a new project.
Last, and let's say the cost is significant - this is actually closer to an equipment leasing situation. And there you'd call this "depreciation."
So to prove this:
Assume you start the program and the boss's decision is made to book the depreciation as COGS, Then assume that in Year 2 you make NO FURTHER SALES REVENUE. But because of the equipment depreciation showing as COGS you would have NO revenue but yet show COGS expense. That doesn't make sense.
Again, go easy on the boss.