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Deloitte Trueblood Case Drug King 4-8

In: Business and Management

Submitted By jazzybanana
Words 3358
Pages 14
Research File Memorandum

Prepared by: Accounting Student

Client: DrugKing. (The Company)
Subject: Accounting for financial asset transfers with related call options and put options Background
DrugKing transfers financial assets with related call options or put options to a substantive third party, InsureAll. There are three different security categories involved – preferred stock, debt security, and receivables.
The DrugKing transfers its investments in the Series A and Series B preferred stock of Tip-Top to InsureAll. The Series A preferred stock is traded publicly (i.e. readily obtainable in the market place) and DrugKing holds a freestanding call option, written by InsureAll, which will allow it to repurchase the asset from InsureAll two years after the transfer date. The Series B preferred stock is not traded publicly (i.e. not readily obtainable in the market place) as the entire series was held by DrugKing prior to the transfer to InsureAll. The DrugKing attaches a call option directly to the Series B stock that will allow it to repurchase the asset from whoever owns it up to two years after the transfer date. Both options have a fixed exercise price.
DrugKing also transfers its investment in a debt security to InsureAll. The asset is traded publicly (i.e. readily obtainable in the market place) and DrugKing holds a conditional call attached to the asset that will permit the DrugKing to repurchase the asset if LIBOR ever decreases below 4% (LIBOR was 6.5% as of the date of the transfer). The option has a fixed exercise price.
DrugKing also transfers two types of receivables to InsureAll – its trade receivables and credit card receivables, neither of which are readily obtainable in the market place. The receivables have a fair value of $100 and book value of $99. The trade receivables are transferred to InsureAll for $103, which includes the...

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