Question

Case A: Revenue Recognition for Products

Smooth Blend, Inc., a calendar year company, produces several blends of whiskey. Maturing whiskey is stored for 3 years in a large, dark aromatic warehouse owned by Smooth Blend. Smooth Blend sells the whiskey to Distributor Company at the beginning of the aging process (January 1, 2011). Distributor Company will pick up the whiskey at the end of the aging process (December 31, 2013) and take it to its facilities for bottling. Distributor Company pays the full purchase price to Smooth Blend on January 1, 2011 to protect itself against price increases.

1. When should Smooth Blend recognize revenue? Why?
2. Would your answer change
   1. If the quality control manager of Distributor Company had the right to taste the whiskey on December 31, 2013 and receive a full refund if not satisfied with the quality of the liquor?
   2. If there was no right of return but Smooth Blend promised to help Distributor Company attract customers?
   3. If Smooth Blend acquired a fixed price option from Distributor Company to repurchase the whiskey in 6 months?
3. How would your answer change if Smooth Blend sold the whiskey to Friendly Bank, agrees to oversee the aging process on the bank’s behalf, and acquires a fixed price forward from Friendly Bank to repurchase the whiskey in 6 months?

Answer 1

As per the revenue recognition

there are three conditions to be satisfied in case of sales of goods

1.) There should be no uncertainity regarding consideration and its ultimate collections

2.) transfer of ownership of goods has been done or

3.) if ownership is not transfered then risk & reward have been transfered

only then revenue to be recorded

Now in given case

1.) There is no uncertainity as ultimate collection is done in begning of aging process  

2.) ownership is also transfered with risk and rewards then smooth blend should recognise the revenue on january 1 , 2011.

No , Answer will change if on december 31,2013 full refund is given due to quality issue then revenue to be reversed

No , if smooth blend promise to attract customer but not to accept the returned goods from customer then revenue to be recognized on january 1, 2011  

if gets an offer of fixed price option then should recognize on such fixed date of 6 month

if smooth blend sold to friendly bank then record revenue on such sale date