Need some advice on how to enter this in the books...

[Blaine]

Hi. I need some advice on how to enter this in the books.

Here's the situation...

I've worked out an arrangement with a manufacturer in Vietnam to help them sell an electronics device in South America. I can give Vietnam a component (chip) that I buy from a company in China/HongKong. China ships it to Vietnam. Vietnam uses it to make their electronic gadget and sells it to South America.

Each gadget that Vietnam sells they give me a royalty.
Let's say the chip is $0.90/unit and I get a royalty of $10/unit.

If I buy 1000 chips from HK, I pay $900 + $100 S&H (to go from HK to Vietnam). HK give me an invoice for $1,000. I wire $1,000 and they send the chips to Vietnam. Every quarter Vietnam tells me how much they sell (i.e., 500 units) and I invoice them (i.e., $5,000).

A nice arrangement, but...

How do I show this in the accounting books?
And do I need to pay any type of use tax/reseller tax (my C corp is in California)?
Do the chips go on my books as inventory, or can I call it an expense and just report the royalty earnings?

So confused as to how to classify it.
Any ideas on how I should handle this?

Appreciate any help.
Thanks

Blaine

PS: I use Quickbooks Pro for Mac.

[Freelancier]

Have you considered that maybe you should be asking this of your accountant instead of random people on a free forum? What you describe is going to show up on your tax return somewhere, so you might as well pay the money now (and only once) to make sure you get it right from the beginning.

[Blaine]

I do my own accounting and have already asked 3 different professional accountants and tax specialists, but I'm getting different answers. So I'm looking to see what others say and what would be the 'norm'. IRS hasn't been helpful. I don't mind paying my share of taxes and strongly believe in doing so. But the question still remains on how to set this up correctly.

Appreciate any feedback.

[Paul]

I think you are getting different answers because there are different options. I had a somewhat similar situation where we purchased components that were shipped to a manufacturer who used them in a finished product. If I recall we had to book it the hard way for audit purposes, inventory in and then out and raw material and finished goods etc. I do remember the accountants debating amongst themselves on that.

However, in your case I would go the simplest way, expense it against the royalty. Technically it is inventory BUT I think an auditor would classify it as immediately depreciated to 0 (or written off or some other method) because you don’t have it in your procession with no feasible way to retrieve and sell it. That means it has no “asset” value and is therefore an expense.

In any case, no matter how you book it, the result is the same from a tax or P&L perspective. The $ 5000 royalty cost you $ 1000 for a net of $ 4000, so I don’t think the tax guys are gonna care how it’s booked.

I am NOT an accountant, just trying to recall some similar situations. Maybe one of the accountants on here has better advice.

[Brian Altenhofel]

I'm getting different answers.

Which accountant is familiar with your type of business and has a good track record within that industry?

Sometimes, there are multiple methods that are good enough for filing accurate taxes, but maybe only one or two of those methods will give you the visibility that you need for your KPI reports. An accountant familiar with your industry will know what methods work for your industry.