Question

1. Boris Company enters into a contract with Bella Company to manufacture, deliver, and install a specially made piece of machinery. The total contract price is $10,000,000. The contract provides that $5,000,000 must be paid to Boris when the machine is delivered and $5,000,000 must be paid when installation is complete. The junior accountant properly concluded that delivery of the manufactured machine and installation of the machine represent two separate performance obligations. The accountant properly allocated $1,000,000 of the contract price to the installation obligation and $9,000,000 to the delivery obligation.

     Boris delivers the machine to Bella’s factory on December 29, 2019 and Boris employees complete the installation of the machine on January 10, 2020.

Required:

Please prepare the appropriate accounting entries for Boris on December 29, 2019 and on January 10, 2020 assuming Bella makes the payments required under the contract.

2. James Company sells college textbooks to State University. Under the terms of the contract, State University may return whatever textbooks it does not sell for a full refund no later than 120 days from the date of delivery. Based on historic sales to State University and other college book stores, 30% of the books delivered are returned for a full refund.

     On August 1, 2019, James delivers books to State University with a sales value of $400,000. The books have a cost to James of $10,000. State University immediately pays the amount owed upon delivery.

  

Required:

Please prepare the entry to reflect the sale of the books for James on August 1, 2019.

Answer 1

Under Boris Company

Total Contract Price

10 Million $

Machine Delivery

5 Million $

Machie Installatin

5 Million $

On 29 , December 2019

Account has wrongly allocated the Installation as well as Machine Delivery charges in Books.

Considering the Delivery and Installation are two different performance obliagtion but dependent upon each other in a contract .

Considering two different perofrmance obligation will not make it separate contract.

AS delivery is depending upon Installation as well as Installaion is depending upon Delivery.

hence Charging 1 M $ to Installation and 9 M $ to Delivery is not appropriate

As contract specifically signify the cost for both the performance.

Hence on 29 December 2019 only Delivery is made, where as Installation is made on 10 Jnauary 2020,

AS per IFRS , Boris will determine the payment will be recived once delivery is made as without installation the machine will not works.

hence, on December 29, 2019 Boris will record its revenue

Bella Company A/c Dr.

10 M $

To Revenue Recognition A/c

10 M $

Because, as both performance is depends upon each other, hence once delivery made only then Installation will be done, so, here on Delivery itself the Boris is certain that revenue will be realised. Hence recording of 10 M $ in 2019 is apt.

Under James Company

AS per Trends and Facts of the James Company, Liable to Return upto 30% of the Sale made.

On Full refund Basis , if sale is not made by the State University woithin 120 Days of Date of delivery.

Hence, here following the trend.

Record revenue 400000 $ - 30% of 400000 $ = 280000 $

But as per Situation State has Already paid the amount , record the full and made provison of Return against the same.

State University A/c Dr.

400000 $

To Revenue Recognition A/C

400000 $

Return of Sale A/c Dr.

120000 $

To Provison for Return of Sale

120000 $