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?

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?

Exercise 9-4 Prepare a Flexible Budget Performance Report [LO9-4]

Vulcan Flyovers offers scenic overflights of Mount St. Helens, the volcano in Washington State that explosively erupted in 1982. Data concerning the company’s operations in July appear below:

The company measures its activity in terms of flights. Customers can buy individual tickets for overflights or hire an entire plane for an overflight at a discount.

Required:

1. Prepare a flexible budget performance report for July that includes revenue and spending variances and activity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Hogan Company uses the net method of accounting for sales discounts. Hogan offers trade discounts to various groups of buyers.

On August 1, 2021, Hogan factored some accounts receivable on a without recourse basis. Hogan incurred a finance charge.

Hogan also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2021, and mature on September 30, 2022. Hogan’s operating cycle is less than one year.

Required:

1a. Using the net method, do sales discounts affect the amount recorded as sales revenue and accounts receivable at the time of sale? YES/NO?
1b. Using the net method, is there an effect on Hogan’s sales revenues and net income when customers do not take the sales discounts? YES/NO?
2. Do trade discounts affect the amount recorded as sales revenue and accounts receivable? YES/NO
3. Should Hogan decrease accounts receivable to account for the receivables factored on August 1, 2021? YES/NO
4. Hogan should report the face amount of the interest-bearing notes receivable and the related interest receivable for the period from October 1 through December 31 on its balance sheet as: CURRENT ASSETS/ NON-CURRENT ASSETS?

Financial Statement Creation – Use the information below to create B/S, I/S and Statement of Retained Earnings after adjusting for the four additional activities below.

1. Consider the following information from a company's unadjusted trial balance at December 31, 2018. All accounts have normal balances.

At year-end, the company accountant realizes that the following transactions have to be recorded:

• November 5, purchase 100 shares for the Treasury at a cost of $7 per share
• Perform half of the work customers paid for in advance
• Dec 1, Issue 1,200 shares of common stock at issue price of $10 per share
• Dec 31, declare and pay a dividend to common stock outstanding of $.50 per share

Exercise 9-4 Prepare a Flexible Budget Performance Report [LO9-4]

Vulcan Flyovers offers scenic overflights of Mount St. Helens, the volcano in Washington State that explosively erupted in 1982. Data concerning the company’s operations in July appear below:

The company measures its activity in terms of flights. Customers can buy individual tickets for overflights or hire an entire plane for an overflight at a discount.

Required:

1. Prepare a flexible budget performance report for July that includes revenue and spending variances and activity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Kailee’s Cookery Pty Ltd sells ovens and access to online cooking classes. On 1 May 2020, Kailee’s Cookery Pty Ltd signs an agreement with Chef School to provide 15 weekly online cooking classes and five ovens. The contract price amounted to $66,000 (GST inclusive), on credit terms n/30 for the ovens and n/60 for the cooking classes. This amount also includes one free service of the oven to be performed six months after the delivery of the ovens to Chef School.

The stand-alone price for the 15 weekly online cooking classes is $33,000 (GST inclusive). The cooking classes will start on 18 May 2020.

The stand-alone price of the ovens is $55,000 (GST inclusive). The six-month service fee for the ovens is usually $1,100 (GST inclusive).

The ovens were delivered on 18 May 2020.

Chef School paid the full amount on 20 May 2020 for the ovens.

By 30 June 2020, 7 online cooking classes were delivered. Chef School has yet to make any payment for the online cooking classes.

Required:

With reference to AASB 15 Revenue from Contracts with Customers, apply the five-step process for revenue recognition in regards to the contract with Chef School. List each of the five steps and show any calculations

a. Jack Repair Shop started the year with total assets of $300,000 and total liabilities of $200,000. During the year, the repair shop recorded $500,000 in computer repair revenues, $300,000 in expenses, and paid dividends of $50,000. The repair shop stockholders' equity at the end of the year was $___________.

b. Costs of goods sold is $15,000 greater than net purchases. If beginning inventory is $110,000, what is ending inventory? Using COGS=BI+P-EI

c. Revenue of $45,000 had been collected, but only $39,000 had been earned. Expenses of $24,000 had been incurred, but only $29,000 had been paid. Based on the accrual basis of accounting, what is the amount of net income?

d. The following is selected information from Tiff. Co for the fiscal year ending October 31, 2019.

Cash received from customers $300,000

Revenue recognized  $375,000

Cash paid for expenses $180,000

Cash paid for computers on November 1, 2018 that will be used for 3 years (annual depreciation is $16,000) $48,000

Expenses incurred, including interest, but excluding any depreciation $220,000

Proceeds from a bank loan, part of which was used to pay for the computers $100,000

Based on the accrual basis of accounting, what is Tiff. Co's net income for the year ending October 31, 2019?

The researchers measured the impact of software that monitors employee-level theft and sales transactions, before and after the technology was installed, at 392 restaurants in 39 states. The restaurants were in five “casual dining” chains."

"The savings from the theft alerts themselves were modest, $108 a week per restaurant. However, after installing the monitoring software, the revenue per restaurant increased by an average of $2,982 a week, or about 7 percent."

"The impact, the researchers say, came not from firing workers engaged in theft, but mostly from their changed behavior. Knowing they were being monitored, the servers not only pulled back on any unethical practices, but also channeled their efforts into, say, prompting customers to have that dessert or a second beer, raising revenue for the restaurant and tips for themselves."

"In the research, the data sets were sizable. For example, there were more than 630,000 transactions by servers tracked and collected each week over the course of the project."

Based on this research, do you think employee monitoring and surveillance are actually good things? Should companies employ more strategies to monitor employee behavior? What are the drawbacks to employee monitoring? Using the ethical models that we are learning in this class (Utilitarianism, Deontology, Virtue Ethics, Ethic of Care), is employee monitoring an ethically sound practice?

Financial Statement Creation – Use the information below to create B/S, I/S and Statement of Retained Earnings after adjusting for the four additional activities below

1. Consider the following information from a company's unadjusted trial balance at December 31, 2018. All accounts have normal balances.

At year-end, the company accountant realizes that the following transactions have to be recorded:

• November 5, purchase 100 shares for the Treasury at a cost of $8 per share
• Perform half of the work customers paid for in advance
• Dec 1, Issue 1,200 shares of common stock at issue price of $9 per share
• Dec 31, declare and pay a dividend to common stock outstanding of $.50 per share