In: Accounting
Question one
Under IFRS, where a right to return exists,
a) sales returns and allowances are recognized as contra accounts to Revenues and Accounts Receivable.
b) a refund liability is recognized.
c) this right is disclosed in the financial statements; no accrual necessary.
d) this right does not need to be disclosed or accrued anywhere.
Part B
Marlin Pools and Spas sold 80 hot tubs at $4,500 each. The cost of the hot tubs to Marlin is $2,600. The terms of the sale include a right to return for full refund within 30 days of purchase. Marlin expects that 3 of the hot tubs will be returned. Marlin follows IFRS 15.
Required:
Question Two
Ace Company manufactures equipment. Ace’s products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $130,000 to $1,100,000 and are quoted inclusive of installation. The installation process does NOT involve changes to the features of the equipment to perform specifications. Ace has the following relationship with Rose Inc.
Ace delivers the equipment on August 1, 2020, and completes the installation of the equipment on October 1, 2020. The equipment has a useful life of 7 years. Assume the equipment and the installations are two distinct performance obligations that should be accounted for separately.
Instructions
a) How should the transaction price of $500,000 be allocated among the service obligations?
b) Prepare the journal entries for Ace for this revenue arrangement for 2020, assuming Ace receives payment when installation is completed.
Question Three
On December 31, 2019, Resilient Company sells production equipment to Ready Corp. for $160,000. Resilient includes a one-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on December 31, 2019. Resilient estimates the prices to be $156,000 for the equipment and $4,000 for the cost of the warranty.
Required:
Question Four
In January 2019, Miller Construction Corp. contracted to construct a building for $3,600,000. Construction started in early 2019 and was completed in 2020. The following additional information is available:
2019 2020
Costs incurred...................................................... $1,458,000 $1,620,000
Estimated costs to complete.................................. 1,560,000 —
Billed ………………………………………………. 1,700,000 1,900,000
Collections during the year.................................... 1,440,000 2,160,000
Miller uses the percentage-of-completion method.
Instructions
Under the contract-based approach for percentage completion,
a) How much revenue should Miller report for 2019 and 2020?
b) Prepare all journal entries for 2019 and 2020 for this contract.
c) What amounts would be presented on Miller’s December 31, 2019 Balance Sheet?
d) What is the gross profit on the project for each of 2019 and 2020?
Question one | ||
Under IFRS, where a right to return exists, | ||
a) sales returns and allowances are recognized as contra accounts to Revenues and Accounts Receivable. | ||
b) a refund liability is recognized. | Correct | Sales price fixed, buyers assumes all risks of loss, buyer has paid some sort of consideration, product sold is substantially complete, amount of future returns can be reasonably estimated |
c) this right is disclosed in the financial statements; no accrual necessary. | ||
d) this right does not need to be disclosed or accrued anywhere. | ||
Part B | ||
Marlin Pools and Spas sold 80 hot tubs at $4,500 each. The cost of the hot tubs to Marlin is $2,600. The terms of the sale include a right to return for full refund within 30 days of purchase. Marlin expects that 3 of the hot tubs will be returned. Marlin follows IFRS 15. | ||
Required: | ||
Record the journal entries related to the above transactions. Assume 1 hot tub is returned within the 30 days. | ||
Now assume Marlin uses ASPE, prepare the journal entries for the above transactions. | ||
a) IFRS | ||
Account Titles and Explanation | Debit | Credit |
Cash (80 tubs x $4500) | $ 360,000 | |
Refund Liability (3 x $4500) | $ 13,500 | |
Sales Revenue (77 x $4500) | $ 346,500 | |
Cost of goods sold (80 tubs x $2600) | $ 208,000.00 | |
Estimated Inventory Returns (3 tubs x $2600) | $ 7,800.00 | |
Inventory (77 tubs x 2600) | $ 215,800.00 | |
Refund liability | $ 4,500.00 | |
Accounts payable | $ 4,500.00 | |
Returned Inventory | $ 2,600.00 | |
Estimated inventory returns | $ 2,600.00 | |
b) ASPE | ||
Account Titles and Explanation | Debit | Credit |
Cash (80 tubs x $4500) | $ 360,000 | |
Unearned Warranty Revenue (3 x $4500) | $ 13,500 | |
Sales Revenue (77 x $4500) | $ 346,500 | |
Cost of goods sold (80 tubs x $2600) | $ 208,000.00 | |
Estimated Inventory Returns (3 tubs x $2600) | $ 7,800.00 | |
Inventory (77 tubs x 2600) | $ 215,800.00 | |
Unearned Warranty Revenue | $ 4,500.00 | |
Accounts payable | $ 4,500.00 | |
Returned Inventory | $ 2,600.00 | |
Estimated inventory returns | $ 2,600.00 | |