Question

On August 1, 2017, Aiken Corporation enters into a contract with Benton Corp. to sell it $25,000 of goods. Aiken will deliver the goods on August 30, 2017, and Benton will pay the full amount upon acceptance. The goods were manufactured by Aiken at a cost of $18,000. Both Aiken and Benton consider the acceptance of the goods on August 30 a formality given that Benton has purchased the same goods from Aiken numerous times without incident. On August 30, 2017, Aiken delivers the goods and Benton transfers cash to Aiken.

Required:

1.	Does an enforceable contract exist between Aiken and Benton on August 1, 2017?
2.	Prepare the journal entries in August 2017 necessary to account for this transaction. Assume Aiken uses a perpetual inventory system.
3.	Next Level Assume that the contract is noncancelable. Would this condition allow Aiken to recognize revenue on August 1, 2017?

Answer 1

PART-1) Does an enforceable contract exist between Aiken and Benton on August 1, 2017?

Answer: Yes, an enforceable contract does exist between Aiken and Benton on August 1, 2017, because both of them have approved the contract, each party’s rights in regard to the goods to be transferred are identifiable, the payment terms are identifiable, the contract has commercial substance, and moreover is probable that Aiken may collect the consideration for which it is entitled

PART-2) Prepare the journal entries in August 2017 necessary to account for this transaction. Assume Aiken uses a perpetual inventory system

Aug-30	Cash	25,000
	Sales revenue		25,000
Aug-30	Cost of goods sold	18,000
	Inventory		18,000

PART-3) Assume that the contract is non-cancellable. Would this condition allow Aiken to recognize revenue on August 1, 2017?

Answer: The existence of a non-cancellable feature of the contract does not permit Aiken to recognize revenue on August 1. Such contract is a wholly unperformed contract until August 30. Revenue recognition cannot occur until performance under the contract occurs. In such case the performance occurs on August 30.