LM is a car dealer that is supplied inventory by car manufacturer SQ. Trading between LM and SQ is subject to a contractual agreement. This agreement states the following:
- Legal title of the cars remains with SQ until they are sold by LM to a third party.
- Upon notification of sale to a third party by LM, SQ raises an invoice at the price agreed at the original date of delivery to LM.
- LM has the right to return any car at any time without incurring a penalty.
- LM is responsible for insuring all of the cars on its property.
When considering how these cars should be accounted for, which THREE of the following statements are true?
- The most significant risks attached to the cars are held by LM.
- The most significant risks attached to the cars are held by SQ.
- SQ should recognise the cars as inventory in their financial statements.
- LM should recognise the cars as inventory in their financial statements.
- SQ should recognise revenue when the cars are delivered to LM.
- When LM sells a car to a third party, SQ should recognise the revenue associated with that sale.