Question

TKO Inc. is a screwdriver manufacturing firm that has been in the New Territories since Jan 1^st, 1960. TKO Inc. makes net income of 20% on each dollar of sales after cost of sales and other expenses are taken care of.

However, TKO Inc. delivered sales of HKD 900,000 between Jan 1^st, 2019 and Dec 29^th, 2019. On December 30^th, 2019, the sales manager of TKO gets a phone call from a new customer called Whampoa Inc. saying that they want to buy HKD 200,000 worth of screwdrivers from TKO Inc. and they want delivery on January 15^th, 2020.

What is the net income of TKO Inc. on December 31^st, 2019? (1 point)

TKO Inc. is under pressure by investors to report a high net income of HKD 200,000 on December 31^st, 2019 and an even higher net income of HKD 220,000 on December 31^st, 2020.

The accounting manager of TKO Inc. remembers that Hang Hau Inc. has always been a reliable customer and has always bought screwdrivers worth HKD 500,000 every year for the past 40 years (this 500,000 has always been included in the recorded 900,000). The accounting manager records a delivery of HKD 200,000 that was originally due on January 31^st, 2020 to Hang Hau Inc. on December 31^st, 2019 but does not actually deliver on December 31^st, 2019.

In this case, assuming that TKO Inc. consistently makes deliveries of sales worth 900,000 HKD every year including 2020, what would the net income of TKO Inc. be on December 31^st, 2019 and December 31^st, 2020. (2 points each à 4 points)

TKO Inc. recently “pushed” new customers like Po Lam Inc. and Tiu Keng Leung Inc. to buy its screwdrivers and offered them 10% discounts to hit its targets. TKO Inc. also sold to these customers without checking whether they would be able to re-sell it to others. TKO Inc. also said that Po Lam and Tiu Keng Leung can pay after 1 year as it was very desperate for sales. What problems do all these actions cause? (5 points)

Please use three sentences or less.

Answer 1

TKO Inc.
Sr.No.	Particulars
Q1.	Net Income for the year Dec., 31, 2019: Revenue shall be recorded only when all the risks and rewards are transferred to the buyer as per agreement. In the given case, sales to Whampoa Inc. will be effected in January, 2020 so the revenue shall be recorded in January 2020. Therefore, Revenue this year = 900000 Net Income = 900000*20% = 180000
Q2.	Assuming that - risks are rewards are transferred on delivery - a) Actual Amount - 2019 Sales = 900000 Net Profit = 180000 2020 Sales = 900000 Net Profit = 180000 b) If the manager records fake delivery, reported amounts would be - 2019 Sales = 1100000 Net Profit = 220000 2020 = Sales = 900000 - 200000 = 700000 Net Profit = 140000, Note: It has been assumed manager has falsified records of 2019 & therefore sales 2020 have to be reduced and there is no falsification in 2020 except this.
Q3	1. Contingent Liabilities: Products are sold without checking this will lead to warranty claims from customers. 2. Bad debt loss: 1 Year credit is granted to newly added customers without knowing their creditworthiness. This may lead to bad debt losses. 3. Loss of revenue: offering discount of 10% has caused loss of revenue to the company.