Question

Omega Coffee Shop enters into a contract with Software Wizards Co. on May 15, 2020, to deliver 100 bags of ground coffee beans to Software on June 1. Software agrees to pay $1,000 for the coffee beans, which cost Omega $6 each. Omega delivers the bags of coffee beans on June 1, 2020, and receives payment from Software on June 20, 2020.

Prepare the journal entries for Omega Coffee Shop related to this contract.

Answer 1

This is a case of a revenue recognition concept which is a generally accepted accounting principle (GAAP) according to which revenue is recognized (or recorded in books) only when the corresponding event occurs. In this question, Omega Coffee Shop will recognize its revenue of $1000 only when it delivers the 100 bags of coffee beans to Software Wizards Co.

The required journal entries for Omega Coffee Shop related to this contract are as follows:

Notes:

1. On 15 May 2020, both the companies only entered into the contract. Neither Omega made the deliveries nor Software made the payments. Therefore no entry will be recorded on this date.
2. On 1st June 2020, Omega delivered the 100 bags of coffee beans to Software (as per the contract) but Software did not make the payment. Therefore, Omega will open an accounts receivables account.
3. On the same date, an entry for the cost of the goods sold to software (i.e. $6 per bag) will be recorded.
4. On 20 June 2020, Software Wizards made the payment, and therefore Omega will record the entry for cash payments and nullify the entry for accounts receivable (as payment has been made and nothing is due from Softwares's side).