Final answer:
The transaction appears to be a financing arrangement where Bradley, Inc. obtains funds from Stephens Company using cars as collateral, with the repurchase amount including the cost of financing. This is not an actual sale but should be accounted for as a financing transaction on Bradley's financial statements.
Step-by-step explanation:
The transaction between Bradley, Inc. and Stephens Company involving a sale and repurchase agreement does not truly reflect a standard sale but rather resembles a financing agreement. On January 1, 2017, Bradley sold cars for $500,000 and had an unconditional obligation to repurchase them at the end of the year for $510,000. This transaction indicates that Bradley, Inc. obtains financing from Stephens Company, using the cars as collateral, and the excess of $10,000 represents the cost of financing, akin to interest.
In terms of accounting implications, Bradley, Inc. would not record a sale of the cars on its income statement. Instead, it would recognize a liability for the obligation to repurchase and an asset representing the cash received, with the difference reflecting the financing cost. On December 31, 2017, when the repurchase occurred, Bradley extinguished the liability and removed the asset from its books, recording the financing cost as an expense over the term of the agreement.