A Loan Versus A Sale Essay

1532 words - 6 pages

A Loan Versus A Sale
Enron’s Case of fraudulent transactions with the banking firm of Merill Lynch proves to be a perfect example of how loans are used to boost sales while in fact they’re technically not sales. In 2004 the “Nigerian barge” transaction ensued with Enron selling electricity-generating power barges to Merill Lynch. A huge sale as the company executives recorded it but it turns out it was actually a loan rather than a sale and that Enron did not actually earned from the transaction thus the investigations by the Securities and Exchange Commission in 2004. Perhaps the big question to be answered in this essay is, why is the transaction considered a loan rather than a sale? And if it were a loan, how would it affect the company’s financial statements?
First, it is important to define what a loan is in order to differentiate it from a sale.
A loan is transaction between two entities that consists the delivery of an article to the other party which shall be used gratuitously and shall be returned at an appointed time, either as the exact article or in a different form that’s equivalent to the article’s worth (Oxford Dictionaries, n.d.). Based on the definition, a loan exists or a loan relationship exists if both of these elements are present: a money debt and a transaction for the lending of money. It is also important to note that a loan always involves repayment set a future point which may or may not involve payment of an interest (HM Revenue and customs, n.d., para.4). A sale on the other hand is defined as a transaction in which a property is transferred from one person to another in consideration of money or its equivalent paid to the owner of the good or product (The Law Dictionary, n.d.). A sale therefore is the acquisition of a good or service in exchange for its monetary equivalent. All sales are recorded under the assets section of all financial statements while loans are recorded under the liabilities section.
Knowing the definition of both loan and sale, one can now infer that the Enron case is a loan primarily because it contains the elements mentioned above. First, it involves a money debt. Enron owing Merill Lynch a huge sum of money and second it is recorded as an official transaction. The only twist with this transaction is the mere fact that instead of monetary transaction alone, Merill Lynch were given the product which were immediately and consciously filed under the company’s sales. Without considering confounding and other external factors, this transaction technically can be classified a sale since there is an automatic inflow of cash upon release of the product. The clincher however is the fact that there is a repayment at a future point and a recall of the good or product sold. In this context therefore, the transaction is clearly a loan and the product or goods used were considered the collaterals. Collaterals are defined as supplementary articles pledged to the lenders as a security for repayment of a...

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