Question

1. Under certain conditions, a manufacturer can recognize revenue when it bills the customer even though the manufacturer holds the goods for later delivery. Which of the following characteristics of a bill-and-hold arrangement would require a manufacturer to wait and recognize revenue when the goods are actually delivered to its customer?

1. The manufacturer has the goods held in a separately designated area of the plant.

2. The customer has a substantive reason for requesting the manufacturer hold the goods.

3. The customer is unsure when it will ask for delivery.

4. The manufacturer retains the right to direct the goods to another customer.

5. None of the above.

2. Cramer Corp. sells inventory (cost $30,000) to Enyart Company on 1/1/2017, for $40,000 cash. Cramer agrees to repurchase this inventory from Enyart on 6/30/2018, for a price of $42,400. What is the correct entry for this transaction on 1/1/2017?

1. Cash 40,000 (dr); CGS 30,000 (dr); Sales Revenue 40,000 (cr); Inventory $30,000 (cr)

2. Cash 40,000 (dr); Inventory 30,000 (cr); Gross Profit 10,000 (cr)

3. Cash 40,000 (dr); Sales Revenue $40,000 (cr)

4. Cash 40,000 (dr); Interest Recvble 2,400 (dr); Sales Revenue $40,000 (cr); Interest Rev 2,400 (cr)

5. Cash 40,000 (dr); Inventory Possessed 30,000 (dr); Repo Liability 40,000 (cr); Inventry 30,000 (cr)

Answer 1

1. The question is recognizing revenue under a Bill and hold agreement. Let us analyze the options:

1. The manufacturer has the goods held in a separately designated area of the plant. -Correct. The seller must properly segregate inventory suppliable under this agreement with his own inventory.
2. The customer has a substantive reason for requesting the manufacturer hold the goods. Incorrect. This is not a condition for the agreement.
3. The customer is unsure when it will ask for delivery. Incorrect. The agreement should specify the fixed date in future by when the goods shall be supplied.
4. The manufacturer retains the right to direct the goods to another customer. Incorrect. The risk and ownership associated with the goods shall be transferred to the buyer. Only possession remains in the hands of the seller. Hence he cannot sell them to any outsider.
5. None of the above. - Since option 1 seems correct, this is also not applicable answer.'

Hence Option 1 is correct.

2. The entry for the transaction is:

1/1/17	Cash a/c Dr	40000
	To Repo Liability a/c		40000
	(Goods supplied under Repurchase agreement and cash received)
1/1/17	Inventory possessed a/c Dr	30000
	To Inventory a/c		30000
	(Goods transferred from Inventory a/c to Inventory repossessed a/c as per the agreement)

Hence the above element of entries are present are found in Option E. Hence it is right answer.