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Chapter 18: 8BE (page 1032)

Presented below are three revenue recognition situations.

(a) Groupo sells goods to MTN for \(1,000,000, payment due at delivery.

(b) Groupo sells goods on account to Grifols for \)800,000, payment due in 30 days.

(c) Groupo sells goods to Magnus for \(500,000, payment due in two installments, the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is \)464,000.

Indicate the transaction price for each of these situations and when revenue will be recognized.

Short Answer

Expert verified

As per the concept of revenue recognition, revenue will be recognized at the time of sale or delivery of goods and services.

Step by step solution

01

Meaning of Revenue Recognition

The concept of revenue recognition defines the circumstances under which revenue is recognized. A GAAP that establishes and accounts for the conditions under which revenue is recognized is known as revenue recognition.

02

Transaction price and time to recognize revenue for each situation 

(a) At delivery, Groupo will earn $1,000,000 in revenue.

(b) At the moment of sale, Groupo will record $800,000 in revenue.

(c) Groupo will record $464,000in revenue at the moment of sale and interest revenue throughout the payment period.

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Most popular questions from this chapter

On October 10, 2017, Executor Co. entered into a contract with Belisle Inc. to transfer Executor’s specialty products (sales value of \(10,000, cost of \)6,500) on December 15, 2017. Belisle agrees to make a payment of $5,000 upon delivery and signs a promissory note to pay the remaining balance on January 15, 2018. What entries does Executor make in 2017 on this contract? Ignore time value of money considerations

How do companies recognize revenue from a performance obligation over time?

Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Organic Growth estimates returns of 20%. Organic Growth sells these seeds on account for \(1,500,000 (cost \)750,000) on January 2, 2017. Customers are required to pay the full amount due by March 15, 2017.

Instructions

(a) Prepare the journal entry for Organic Growth at January 2, 2017.

(b) Assume that one customer returns the seeds on March 1, 2017, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased \(100,000 of seeds from Organic Growth.

(c) Assume Organic Growth prepares financial statements quarterly. Prepare the necessary entries (if any) to adjust Organic Growth’s financial results for the above transactions on March 31, 2017, assuming remaining expected returns of \)200,000.

What is the proper accounting for volume discounts on sales of products?

In September 2017, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for \(15,000 (\)100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional \(4,275 (\)95 per station). All sales are cash on delivery.

Instructions

(b) Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately.
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