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Question 2b

Delta is an entity which prepares financial statements to 31 March each year. During the year ended 31 March 2014 the following events affected Delta:

(b) On 1 April 2013, Delta completed the manufacture of some inventory at a total cost of $800,000. In order to be suitable for sale in the ordinary course of business, the completed inventory needed to be stored in controlled conditions for a two-year period. The inventory is expected to sell for $1,200,000 after the two-year storage period. On 1 April 2013, Delta sold the inventory to Epsilon, a bank. The agreed sales proceeds were $810,000 but Epsilon charged Delta an administration fee of $10,000, so the net amount received by Delta was $800,000. Delta retained physical custody of the inventory and continued to ensure that it was stored in the appropriate conditions. Delta indemnified Epsilon against any losses caused by theft or inappropriate storage of the inventory. Delta has the option to repurchase the inventory on 31 March 2015 for $933,120. On 1 April 2013, Epsilon would have required an annual return of 8% on loans made to customers such as Delta. (7 marks)

Required:
Explain and illustrate (where possible by quantifying amounts) how the three events would be reported in the financial statements of Delta for the year ended 31 March 2014.

Note: The mark allocation is shown against each of the three events above.