[tx-rustler]

Direct business to business - no barter broker

If I trade inventory for advertising

1. The inventory item is sold (bartered) at market and the income is sent to a barter checking account.
1a. Inventory asset decreases by the average cost
1b. COGS increases by the average cost
1c. As a result on the P&L for that transaction, there is a profit (sales less cost)

2. I write a barter check for the difference between cost and sales and use the advertising expense account.

All seems OK, profit for the transaction is zero. But I have a balance in the barter checking account - an asset that shows up on the balance sheet.

If I write a check for advertising for the full amount in the barter checking account, aren't I expensing the cost of inventory items traded twice (the COGS entry and the part of the advertising entry that duplicates cost)?

Is there an EOY adjustment made to the barter checking account, if so how? How do I get rid of the balance in the barter checking account (which is on the balance sheet as an asset)?

Stumped in Texas

[rehmanvohra]

Barter transactions are recorded at the fair value of assets give up or the fair value of asset received, whichever is easily determinable. In your query, there is an element of cash involved. Why should you give up your profit by cash?

Assume
1. Advertising charges at arm's length costs $800
2. Cost of inventory given $600
3. Sale price of inventory is $800
4. Check is issued for $200 representing profit

The entries are:
Advertising expense 800
Sales 800

Cost of sales 600
Inventory 600

Advertising expense 200
Bank 200

In this manner, your advertising expense is more than the fair value of service received by 200

It would be more clear if you were to give a complete example. Please mention the values of items involved in the manner I have assumed, please.

[tx-rustler]

In this situation, I barter an item of inventory that cost $35.00, and has a resale value of $100.00.

I get $100.00 worth of advertising.

When I relieve inventory of the item, the cost goes to COGS.

I have a spreadsheet available which shows the two situations as journal entries and in T-charts with transaction P&L and balance sheets.

I either end up with an asset that does not exist on the balance sheet or an expense of 135.00 rather than 100.00.

You can get the spreadsheet here
http://www.ernest-education.com/QB-downloads/bartering problem.xls

Thanks for trying, I do appreciate it.

[tx-rustler]

Well it looks like you will have to cut and paste the link, the space in the spreadsheet name has caused the forum to drop the full link. Sorry about that

[ArcSine]

tx-rustler, if I'm reading your question right, I think the answer is that you DO want to write the barter check for the full amount of the advertising cost.

In your example, you're essentially swapping an inventory item (cost 35, value 100) for advertising services (value 100). (Okay, I know you're not directly trading with the advertising provider, but it's the same end-of-the-day result).

When all your entries are booked, you'd want the result to be
Sales (100)
COGS 35
Inventory (35)
Advertising expense 100

It might be helpful to decompose the transaction into two components. Imagine that (first) you sell your inventory for $100 cash, and (second) you then spend that $100 cash on advertising services. After booking those two transactions independently, you'd end up with the results above.

If it's counterintuitive to you having total expenses of $135 on your PnL, it'll help to remember that two-element breakdown of the situation. You DO have that much total expense: You sent a $35 inventory item out the door (Expense 1), AND you bought $100 of advertising services (Expense 2).

And finally, think about it from the advertising-service provider's standpoint: If they've provided 100 bucks' worth of ad service, they don't want to open their mailbox to find a barter check for $65!

I hope this spin maybe cleared things a bit; best of luck!