Acceptances under letters of credit against merchandise received under trust receipt;

              106 HASKINS & SELLS October
Acceptances Under Letters of Credit Against Merchandise
Received Under Trust Receipt
(Reprinted from the July, 1930, Bulletin of the American Institute of Accountants)
ONE detail in accounting practice con­cerning
which there seems to be some
lack of knowledge, or lack of consideration
on the part of accountants, is the treat­ment
of acceptances under letters of credit.
In order to avoid misunderstandings it is
important that accountants should be thor­oughly
informed regarding the handling of
such transactions.
Ordinarily banks issuing letters of credit
either hold documents evidencing posses­sion
of the merchandise against which they
have accepted drafts, or have delivered the
merchandise to the customer on a trust
receipt. In either case, the bank holds
title to the merchandise, as the trust re­ceipt
states that the merchant or manu­facturer
holds the merchandise at all times
in trust for the bank, or if sold, the ac­counts
receivable or proceeds of the sale,
as security for the payment of the draft.
A bank rarely delivers merchandise under
acceptances without securing a trust re­ceipt.
Often it would be difficult to identify or
segregate the pledged assets, because the
merchandise released to the manufacturer
on trust receipt may have gone into manu­facture
and lost its identity before the
liability has been discharged. In such
cases it is impossible for the accountant
to show the specific asset pledged, but it
is important to indicate that the bank,
theoretically at least, has recourse to the
merchandise ahead of any other creditor
should the acceptance not be paid. Proper
accounting requires that all secured lia­bilities
should be captioned as such.
Acceptances under letters of credit may
be described in various ways, but a de-