CCI conducted a strategic review of its product lines during the fourth quarter. In conjunction with this it found $ 8 million (at book value) of an older model hard drive in the back of the warehouse. Newer inventory had been placed over in front of the old inventory and the older model had not been shipped on a timely basis. New models are now faster and more reliable. CCI was close to closing a deal with a traditional customer to sell the inventory for $5.5 million when management found a third party broker, Sterling Vendors, which specialized in structuring transactions in which companies are able to exchange excess merchandise for much needed goods and services. CCI decided to accept an offer on June 25, 2016 in which Sterling Vendors would pay CCI $9 million for its outdated inventory. Payment was received by CCI in the form of $9 million in service credit, redeemable by CCI for a variety of services performed by other clients of Sterling such as office cleaning, waste disposal, and even credits at a major hotel chain that could be used for business travel. For example, credits at a major hotel chain or air travel could be booked at the motel chains or airline’s published rate at the time the travel is booked. Note: the published fares represent fares that are posted in hotel rooms or maximum coach fare for air travel. The service credits cannot be converted to cash and should not be considered cash equivalents, and do not have an expiration date. Required: a. Prepare a one page memo for Susan Madigan explaining the appropriate accounting treatment for the sale of inventory to Sterling Vendors. Your memo should include a journal entry to book the transaction as of June 25, 2016 with supporting logic.
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