I'm studying for the CPA and it says that under revenue recognition when you have a "call option" to repurchase an asset at a later date for more consideration than the sale price you would book an Debit to interest expense and a Credit to financial liability for the difference between the sale price and the amount you would buy it back for. If the option lapses unexercised then you Debit financial liability and Credit Revenue. My question is why would the Interest expense become revenue in the option is unexercised? It seems like if someone wanted to overstate there revenues they could enter into contracts with crazy buy back rates and then never exercise the option to buy it back. Like if I sold equipment to a company for $200,000 with a call option to buy the equipment back at 400,000 in 2 years I would book. 01/01/18 Cash 200K Financial Liability 200K Int. Exp 200K Fin Liab. 200K 12/31/19 Fin Liab. 400K Rev 400K Or is this okay because the interest expense will net out with revenue?
