In 2006, we committed to a vendor to make some product for us.
We subsequently had to cancel the orders and paid the vendor a cancellation fee
Dr P&L Cr Accts Payable this fee was then paid.

In December, we had this vendor make some product for us and expected to be
Billed for it.
Dr. Inventory Cr. Accts Payable

We then closed out the year 2006

In 2007 our vendor nicely decided to not bill us for the inventory made in
December, and to treat the costs to making the inventory as part of the
Cancellation fee.

What is the proper accounting here?
Is it
Dr. Accnts Payable cr. Inventory
Note then that Inventory will be at 0 cost

OR
Is it
Dr. Accts Payable cr. P&L

Thank you in advance,
Herman

You would:
Dr. AP
Cr. Inventory.

The numbers above will be to reverse your December entry.

However, you then must apply your cancellation fee towards this. So…
Dr. Inventory (for the amount of the cancellation fee that went towards this, so all I guess?)
Cr. P/L (Expense) which you had set up for the cancellation fee that you paid.

You would:
Dr. AP
Cr. Inventory.

The numbers above will be to reverse your December entry.

However, you then must apply your cancellation fee towards this. So…
Dr. Inventory (for the amount of the cancellation fee that went towards this, so all I guess?)
Cr. P/L (Expense) which you had set up for the cancellation fee that you paid.


Thank you for your response.
Net of your entries is Dr. AP, Cr P&L, I will proceed

Cheers

The inventories would only cancel each other out if the December record price is equal to that of the cancellation fee that you paid.

The inventories would only cancel each other out if the December record price is equal to that of the cancellation fee that you paid.


Captain,
The more I think about this, the more circular it gets.
If I go ahead with this entry, Dr> A/P, Cr P&L, I will now have inventory on my books for which I have not paid anything for, yet it will have a "cost" to it.
This troubles me, am I thinking about this too much?
Regards,
Herman

The inventory DOES have a cost.

The cost is the value of the "cancellation fee" that you paid. Since all that money is going towards THIS purchase.

The inventory DOES have a cost.

The cost is the value of the "cancellation fee" that you paid. Since all that money is going towards THIS purchase.


I appreciate your patience, but now I do not follow you.
Let me try again so you can see my conundrum

September 2006
Dr P&L account $300k cr AP $300k for cancellation fee for 3 separate runs of inventory that had to be cancelled
The $300k was subsequently paid in October 2006


December 2006
Dr Inventory $100K cr Accrued Expenses $100k
earlier I had written that the credit was to AP but we never actually received invoice.
we expected to receive invoice but when we closed the books in December 2006 we had not received invoice so I just credited an accrual account


June 2007
Dr Accrued Expenses $100k cr P&L account $100k

As you can see with this solution, my Inventory is now valued at a cost of $100K but as we know, I never really paid this amount. That part is making my head hurt.

Alternatively, I could credit Inventory for the $100K, but then going forward my Inventory will be valued at $0.

Again, appreciate your thoughts,
Regards,
Herman

I appreciate your patience, but now I do not follow you.
Let me try again so you can see my conundrum

September 2006
Dr P&L account $300k cr AP $300k for cancellation fee for 3 separate runs of inventory that had to be cancelled
The $300k was subsequently paid in October 2006


December 2006
Dr Inventory $100K cr Accrued Expenses $100k
earlier I had written that the credit was to AP but we never actually received invoice.
we expected to receive invoice but when we closed the books in December 2006 we had not received invoice so I just credited an accrual account


June 2007
Dr Accrued Expenses $100k cr P&L account $100k

As you can see with this solution, my Inventory is now valued at a cost of $100K but as we know, I never really paid this amount. That part is making my head hurt.

Alternatively, I could credit Inventory for the $100K, but then going forward my Inventory will be valued at $0.

Again, appreciate your thoughts,
Regards,
Herman


Anyone?

I am at a loss as to why you would credit an expense in December of 2006, but that is not the issue at hand.

What you have is fine, keep the inventory at 100K

While you didn't send them a cheque for the 100K, you send them a cheque from 300K last October. Part of that money (1/3) is now being reallocated back to you for this inventory.

You will have to make an adjustment to decrease your 2006 expenses by 100,000 and increase your 2007 expense by 100,000 (although you have already done the latter)