4
ACCO 310 – Financial Reporting I – Weekly Tutorial
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ACCO 310
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Financial Reporting I
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Summer 2023 – Weekly
Tutorial #5
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Topic 5
REVENUE RECOGNITION
Recognize Revenue from the Sale of Goods When There Is
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1) Performance → Transfer of Risks and Rewards. Key considerations:
o Which party has legal title to the goods that were sold
o Which party has possession of the goods that were sold
2) Measurability of Revenues and Costs
3) Collectability is probable
4) No Continuing Involvement
1) Measurability of Revenues and Costs
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2) Collectability is probable
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Recognize Revenue for Services When There is
Earnings Approach (ASPE)
•
The earnings process for services differs from that of the sale of goods
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For the sale of goods, the critical event is the delivery of the goods
o The risks and rewards of ownership are transferred to the customer
o The seller has no continuing involvement or control over the goods
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Recognize revenue at each critical event, as long as collectability is probable and
costs/revenues can be measured reliably
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For services, the performance of the service (which may be an ongoing, multi-step process)
determines revenue recognition
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Uncertainty Regarding Measurement
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How can a seller recognize revenue if there is Measurement Uncertainty ?
▪
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o i.e. it is difficult to measure the amount of revenue (or costs) that will eventually be
collected (or incurred) from a sale.
2 Options are available:
a. Wait until measurement uncertainty is resolved, and then recognize revenue → Conservative
b. Recognize revenue but accrue the uncertain amount as a cost or reduced revenues
•
EXAM
o Under the Earnings Approach, in order to recognize revenue the company must believe
that collection of payment will ultimately occur. If the company can estimate
uncollectible amounts based on ______________________, the revenue can be recorded
and the uncollectible amounts are accrued for.
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o Revenue should not be recognized if the entity is subject to significant and unpredictable
amounts of goods being returned, i.e. if they are selling a new product and there is no
way to assess returns.
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o Measuring parts of a sale becomes more complex when there are multiple deliverables
involved, i.e. a product and service are sold together as a bundled package.
Uncertainty Regarding Collectability
•
The company’s expectation of being able to collect on the sale is required in order to
recognize revenues
•
If collectability is not reasonably assured, then revenues cannot be recognized at the time of sale
o Recording the sale then defaults to cash-basis → i.e. recognize revenues as cash is
received → conservative!
Timing of Transfer of Title, and thus, revenue recognition, is impacted by the shipping terms
agreed upon by the 2 parties:
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1) FOB Shipping Point – title is transferred to customer when merchandise leaves supplier’s
loading dock
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2) FOB Destination – title is transferred to customer when merchandise physically reaches
the destined location specified by the customer
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Non-refundable Upfront Fees
•
Charge customer a fee that is nonrefundable before they deliver a product or perform a service
•
Record over the period that the service is being rendered
•
Do not recognize in revenue at the time cash is received
Contract-Based Approach (IFRS 15)
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Example: Activation fees charged by phone company, administrative fees at Concordia
Also called “Asset-Liability Approach”
•
Revenues are recognized to depict the transfer of goods/services to customers (based on the
asset or liability that arises from contracts with customers)
•
Used for long-term contracts
•
5 steps are used within this approach :
Step 1: Identify the contract with customers
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o A contract is recognized when all of the following conditions are met :
i) The entity is party to the contract and both parties have approved the contract (they
are committed to perform their obligations)
ii) The contractual rights are collectible/measurable
iii) The performance obligation is measurable
iv) Payment terms can be identified
v) Collection of $ is probable
o What happens if there is a modification to the contract?
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o Do we need a whole new contract or can it be considered as a modification to the existing one?
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o Treat as a new contract if :
i) The goods/services are distinct from those mentioned in the existing contract
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ii) The price increases in order to reflect the consideration to be given for the additional
goods/services
*Distinct does not mean a completely new product. It means that the company can benefit
from it (i.e. sell an additional 30 units of the same product for 45 $ each)
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o Net contract Position :
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The balance of contractual rights less contractual obligations
▪
At the point of signing the contract, no journal entry is made
▪
At least one party has had to perform
▪
If remaining rights > remaining obligations, the contract is in an asset position
▪
If cash is received in advance (service is still not rendered and obligation is still not
performed), then the contract is in a liability position
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▪
Step 2: Identify the separate performance obligations in the contract
o Performance obligation = promise to provide a good/service to the customer
o Could have many obligations in the same contract
o If goods/services are interrelated or interdependent, then only 1 obligation exists
o Recognize revenue for each distinct performance obligation
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Example: Sale of vacuum and of an extended warranty (a portion of the revenue will be deferred)
– Treated as separate performance obligations
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Step 3: Determine the price of the transaction
o This is the consideration to be received in exchange for the transfer of goods/services
o EXAM : you may be given a variable consideration (such as discounts, rebates, royalties
or performance bonuses) and you have to determine if revenue should be recorded for
that amount (or net of that amount)
o Only Record if there is reasonable assurance that the company will be entitled to
receive that amount. Two conditions :
i) The company has experience with similar contracts → able to estimate the amount of revenue
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ii) High probability that the revenue to be recognized will not be reversed
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o If non-cash consideration is received (i.e. perform a service in exchange of an asset, such as land),
then record the transaction at the FV of the asset received.
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Step 4: Allocate the transaction price to the separate performance obligations
o A steel company has signed a contract with Italian engineers for the installation and maintenance
of new equipment that will help automate the production of steel. The contract price for both
services is $ 500,000.
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o The contract price must be allocated to the two performance obligations : Installation of
equipment and maintenance.
o Ask the question: Can we determine the stand-alone values of installing and maintaining this
equipment? To determine the stand-alone value :
i) Estimate the price that customers pay for similar equipment by looking at
competitors’ prices or how much it sells for in the market (Adjusted Market
Assessment Approach)
ii) Using experience, estimate the cost of installing this equipment and apply a profit
margin (Expected cost plus a margin)
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Step 5: Recognition of revenues
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iii) If it is too difficult to estimate the stand-alone value of installing the equipment
(because highly variable or uncertain), then take the total contract price of $ 500,000
and start deducting the known prices of other items being sold so that we may arrive
at a residual value for installing the equipment (Residual Approach)
o Revenues are recognized when :
i) The company has a right to payment for the asset
ii) The company has transferred legal title to the asset
iii) The company has transferred physical possession of the asset
iv) The customer has accepted the asset
v) Risks and rewards of ownership have passed to the client
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Two types of methods of accounting for contracts will be discussed further on in this topic :
% of completion and Completed Contract method
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Bundled Sale (FV Method)
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SOS sells a dish washer to a customer with a two-year warranty for $1,000. Individually,
the dish washer sells for $900, whereas the two-year warranty sells for $160. The
customer pays cash up front and takes the dish washer home. How much revenue should
SOS recognize and when?
Separate the items and allocate the price using their relative fair market value
FV of Dish Washer:
FV of two-year Warranty:
Total
$900 → 900/1,060 = 85% x
$160 → 160/1,060 = 15% x
1,060
$1,000 = 850
$1,000 = 150__
1,000
Timing of revenue recognition → When customer takes possession of the dishwasher at
the point of sale, the revenue recognition criteria are met. Therefore, recognize $850 in
revenue when the customer takes possession of the dish washer
1,000
___________________
850
___________________
150
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___________________
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Recognize the service revenue for the warranty _________________ the 2 years.
At the End of Year 1:
Unearned Revenue 75
Revenue
75
At the End of Year 2:
Unearned Revenue 75
Revenue
75
There are two types of warranty contracts:
1) Assurance-Type Warranty
o When product is sold, the seller guarantees that the product meets agreed-upon specifications
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o Does not require a separate performance obligation (considered part of the product)
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2) Service-Type Warranty
o Provides additional services, such as continuous repair and maintenance,
for a certain period of time
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o Recorded as a separate performance obligation
o A portion of the transaction price (selling price) will be allocated to this warranty.
If the company received the cash upfront at the point of sale of the product,
the company will have a deferred revenue until the warranty period has expired
o Record revenue straight line over warranty period
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Consignment Sales
The Consignor ships inventory to the Consignee
•
The consignee acts as an agent to sell the inventory
•
Possession transfers to the consignee but legal title remains with the seller!
•
There is no transfer of Risks and Rewards
•
The consignee (seller) holds the goods as ‘Merchandise on Consignment’
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o They are not recorded as inventory on consignee’s books!
When the goods are sold, the consignee remits cash to the consignor (after deducting a
commission and other chargeable expenses)
Bill and Hold Arrangements
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Company invoices a customer for the sale of a product, but the entity keeps physical
possession until it is transferred to the customer
•
Happens because the buyer is not ready to receive the product, but takes legal title and accepts billing
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Reasons include :
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i) Lack of storage space
ii) Delays in production schedule
iii) At the moment, the customer has a sufficient amount of inventory
The company can recognize revenue if all of the following conditions are met:
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i) The reason to hold the inventory must be substantive
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ii) The product must be separately identified as belonging to the customer (set apart from the others)
iii) The product must be ready to ship
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iv) Company cannot use the product or sell it to another customer
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Principal-Agent Relationships
Principal provides the good or performs the service
•
Agent is hired by the principal to act on its behalf. Used to help arrange the contract. In turn,
the agent receives a commission.
Examples: Travel Agencies, Remax, Insurance Brokers
There are specific criteria used to determine whether one really qualifies as a principal/agent
(the amount to be received by the agent is predetermined, fixed, or a % of the total amount
charged to the customer)
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Repurchase Agreements
Seller has the right or the obligation to repurchase an asset that was sold to a customer at a
later date
•
Did the company actually sell the asset?
•
Record as a financing transaction if the company must repurchase the asset for an amount ≥
what it was sold for
•
The asset was never removed from the books of the company selling
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Example: Sells an asset on Jan. 1st for $ 50,000 and agrees to buy it back on
Dec. 31st for $ 75,000.
January 1st
50,000
50,000
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Cash
Contract Liability
December 31st
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Because it’s a financing transaction and a liability, interest will be charged
Interest Expense
Contract Liability
25,000
25,000
Liability is extinguished when the company repurchases the asset
75,000
75,000
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Contract Liability
Cash
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Methods of accounting for long-term contracts
Under ASPE:
1. Percentage-of-Completion Method
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o Revenue and gross profit are recognized each period based on progress or % of a
contract’s completion
o When performance consists of several ongoing acts (i.e. continuous earning process),
then % of completion is preferred, as long as the company can measure the transaction
2. Completed-Contract Method
o When performance consists of a single act, or progress cannot be measured, then the
completed-contract method would be used.
o Here, revenues and gross profit are only recognized after the entire contract is completed.
o Similar to IFRS’ zero-profit method (Under IFRS, we use zero-profit and under ASPE,
we use the completed-contract method)
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Under IFRS:
Recognize revenue over time if one of the following conditions is met :
i) The customer receives and consumes the benefit over time
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ii) The customer controls the asset as it is being created
iii) The company does not have an alternate use for the asset and has a right to payment for
its performance
% of completion method is acceptable or can use zero-profit method
•
If an estimate of the costs incurred to date (% of completion) cannot be made, then the
company revenues = cost until the uncertainty is resolved.
•
This is called the Zero-Profit Method.
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Losses on Long-term Contracts:
•
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Loss in current period on a profitable contract
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Example: Construction costs are higher in one period than another, resulting in a
loss for that period. Overall, at the end the contract is still profitable.
o Record loss in current period. No need to adjust revenues retroactively because change in
accounting estimate (Under % to complete)
o Instead of restating prior period, the new estimate of the higher costs (and the losses
arising from these new costs) is absorbed entirely in the new period.
•
Loss on an unprofitable contract
Example: A loss results once the contract is completed (so the revenue to be
generated on the contract is less than the costs incurred)
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o The entire loss expected on the contract must be recorded in the current period
Prior profits will be reversed (Under both methods)
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5 Journal Entries for Percentage of Completion Method
1) Record the costs incurred for the project
3) Record the cash collected on the billings
4) Record the revenue, expenses, and profit on the project
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2) Record the billings or invoicing
5) When project is over, close Construction in Process (CIP) and Billings on CIP accounts
Percentage Complete = Costs Incurred to Date_______
Most recent Estimated Total Costs
Revenue (or GP) to be recognized to Date = % Complete x Estimated Total Revenue (or GP) from project
Current Pd Revenue Recognized = Revenue to be recognized to Date-Revenue recognized in previous pds
Example: Percentage of Completion
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January 1, 2011
December 31, 2013
$900,000
$800,000
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Contract Initiation Date:
Contract Completion Date:
Contracted price:
Projected contract cost:
2011
2013
200,000
583,200
810,000
Projected Costs to Complete
Estimate Total Costs
Progress Billings for the Year
600,000
226,800
0_
180,000
480,000
240,000
Cash Collections during Year
150,000
350,000
400,000
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Total Cost to Date
2012
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1) To Record Construction Costs incurred for 2011:
Dr. Construction in Process
$200,000
Cr. Materials, Cash, Payables
$200,000
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2) To Record Progress Billings:
Dr. Accounts Receivable
$180,000
Cr. Billing on Construction in Process[
] $180,000
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Contract Price [a]
Percentage Complete [b]
Revenue earned to Date [ a *
b]
$150,000
$150,000
2011
2012
2013
$900,000
25%
$900,000
72%
$900,000
100%
$648,000
$900,000
($225,000)
($648,000)
$423,000
$252,000
$225,000
Less: Revenue Recognized
previously
Current Year Revenue recognized
$0
$225,000
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3) To Record Cash Collections:
Dr. Cash
Cr. Accounts Receivable
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Heavily Tested on EXAM → Journal Entry to Record Gross Profit/Loss at Year-end
4) To Recognize Revenue and Gross Profit at Year-end:
$25,000
$200,000
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Dr. Construction in Process ( ____________ )
Dr. Construction Expenses
Cr. Revenue from LT Contract
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Journal entry to record a Gross Loss:
Dr. Construction Expenses
$XXXXX
Cr. Revenue from LT Contract
Cr. Construction in Process ( __________ )
$225,000
$XXX
$XX
IMPORTANT: Debit CIP for Gross Profit, Credit CIP for Gross Loss
EXAM TIP: If the project incurs an overall loss, recognize the entire loss immediately!
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5) At Completion of Contract in 2013, close the CIP and Billings on CIP accounts:
$900,000
$900,000
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Dr. Billings on Construction in Process
Cr. Construction in Process
Percentage of Completion – Financial Statement Presentation
The balance of the Construction in Process account represents the Costs Incurred + Gross
Profit recognized to date
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The balance of the Billings on Construction in Process represents the billings made to the
customer to date
The difference between Construction in Process and Billings on Construction in Process is
recorded on the Balance Sheet as either:
o Current Asset (with Inventories) if difference is a Debit balance, or
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ACCO 310 – Financial Reporting I – Weekly Tutorial
o Current Liability if the difference is a Credit balance
Percentage of Completion Method
Dr. Construction in Process
Cr. Materials, Cash,
Payables
Completed Contract Method
Vs.
1) To Record Construction Costs
incurred for the Year:
$200K
Dr. Construction in Process
$200K
2) To Record Progress Billings:
$200K
2) To Record Progress Billings:
$180K
Dr. Accounts Receivable
Cr. Billing on Construc. in
Process
$180K
3) To Record Cash Collections:
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Both JEs are the Same
Dr. Cash
$200K
Cr. Materials, Cash, Payables
Both JEs are the Same
Dr. Accounts Receivable
Cr. Billing on Construc.
in Process
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1) To Record Construction Costs incurred
for the Year:
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$180K
$180K
3) To Record Cash Collections:
$150K
$150K
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Cr. Accounts Receivable
Dr. Cash
$150K
Cr. Accounts Receivable
$150K
Both JEs are the Same
4) Recognize Revenue & Gross Profit at the End of
Each Year :
Dr. Construction in Process
(profit for 1 yr.)
$25K
$200K
$225K
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5) Record Completion of Contract Project
End (2013):
Dr. Billings on Construction
in Process
$900K
Cr. Construction in
Process
Dr. Construction Expenses
Cr. Revenue from LT
Contract
$810K
$900K
JEs are DIFFERENT!
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Dr. Construction Expenses
Cr. Revenue from LT
Contract
No JE to record Revenue or Gross Profit at the end
of every year!
4) Recognize Revenue & Gross Profit at the
End of Contract :
Dr. Construction in Process (Profit
for Entire Contract)
$90K
5) Record Completion of Contract
Project End (2013):
Dr. Billings on Construction in
Process
$900K
Cr. Construction in Process
$900K
$900K
Both JEs are the Same
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NOTES
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ACCO 310 – Financial Reporting I – Weekly Tutorial
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PRACTICE PROBLEMS – TOPIC 5
Practice Problem #1 – Multiple Choice
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1) J&J Corporation uses the percentage of completion method for revenue recognition. In 2012,
J&J entered into a contract to construct a warehouse for $12 million (fixed-price). Additional
information relating to the contract is below:
At December 31st
% of completion
Est. Total Cost at Completion
Gross Profit recognized (cumulative)
2012
2013
15%
45%
$9,000,000
$9,600,000
600,000
1,440,000
$2,880,000
$2,970,000
$3,150,000
$4,320,000
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a.
b.
c.
d.
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Under the earnings approach, contract costs incurred during 2013 were:
2) K&K uses the percentage of completion method for revenue recognition. In 2012, K&K started
work on a $14 million construction contract that was completed in 2013. Additional
information relating to the contract from 2012 year-end is below:
Progress billings
$4,400,000
2,800,000
Costs incurred
4,200,000
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Collections
8,400,000
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Est. Costs to Complete Contract
For 2012, how much Gross Profit should the company recognize? (If the exam asks for income,
it means the same thing)
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a. $1,400,000
b. $933,334
c. $466,666
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a.
b.
c.
d.
Reduce inventory, but do not record revenues
Do not reduce inventory, but record revenues
Reduce inventory and record revenues
Do not reduce inventory or record revenues
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3) ABC Ltd. Ships goods to XYZ Inc. on consignment. What entry to should be made to record
this transaction ?
4) In December of the current year, SOS sold 100 course packs for $60 each with a 45-day
unconditional right of return. Since this is a new product revenue for SOS, the company has
no past history regarding the number of estimated returns. Which of the following is true
regarding SOS’s December 31st, 2017 financial statements?
Sales of $6,000 should only be recognized in the following year when the return privilege expires.
Sales should only be recognized when cash is collected on the books
Sales of $ 6,000 should be recognized in 2017, but a reserve will need to be taken for returns
Sales of $ 6,000 should be recognized in 2017 and any future costs relating to the returns
should be accrued as an estimated liability.
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a.
b.
c.
d.
a.
b.
c.
d.
$5,000,000
$2,000,000
$3,000,000
$6,000,000
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5) Concordia University collected tuitions in advance from students over the course of the year
in the amount of $8,000,000. The adjusted balance in the Unearned Revenues account
increased from $3 million to $6 million dollars during the year. What were Concordia’s
revenues from earned tuition fees for the current year?
$ 57.83
$132.17
$160.00
$190.00
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a.
b.
c.
d.
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6) A television and service warranty are bundled together and sold to customers for $190. If
sold separately, the fair values of the television and warranty are $160 and $70 respectively.
How much of the revenues would be allocated to the television under the fair value method ?
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Recognize a $ 5.25 million gross profit on the contract in 2017
Recognize a $ 7.5 million gross profit on the contract in 2017
None of the answers are correct
Recognize a $3.75 million loss on the contract in 2017.
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a.
b.
c.
d.
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7) Palomino Corp. began a service contract in 2016 that will provide it $150 million of total
revenues when it is completed in 2018. In 2016, Palomino incurred $36 million of costs related
to this contract. It estimates that an additional $84 million of costs will be required to complete
the contract. Assuming that in 2017, the company incurred costs of $ 63.75 million and
estimates that an additional $42.75 million will be required to complete the project, using the
percentage-of-completion method, how should they account for this project ?
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Practice Problem # 2
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On January 1st, 2012 ACME (American Company that Manufactures Everything) distributes
multiple items and does customized manufacturing for specific customers. Acme sold to a luxury
resort LCD TVs worth normally $10,000, Plasma TVs for $20,000, and Satellite Dishes for
$10,000, Installation charge fees $6,000, and Service contract $4,000, for a simple price of
$40,000. The service contract covers all parts and labours and is valid for a period of four years.
The company’s policy is to amortize the service contract on a straight-line basis. Acme’s terms
for the merchandise are 2/10 net 30 FOB shipping point on sales merchandise items only. The
company uses the gross method to record discounts. The customer paid the service contract on
the day of the transaction whereas the merchandise was collected half within 7 days, and paid the
balance in 30 days. The company estimates the installation to take two years to complete and will
be invoiced throughout the two year period.
Required: Prepare the journal entries required to record the sale of merchandise, the service
contract, the discounts offered to clients and any balance of payment for 2012 only.
2012
$1,000
$1,000
$1,500
$1,000
2013
$3,000
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Costs incurred to date
Costs to complete
Amount invoiced
Amount collected
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For pre-midterm, % of completion contracts will be analyzed more theoretically and will be
tested mostly from a multiple choice perspective
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$3,300
$3,800
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Practice Problem # 3
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Porter Corp. provides a range of accounting and consulting services for York Corp. The
consulting practice of the office signed a contract for a $70,000 lump-sum payment in August of
2012. Porter believes that it can reasonably estimate future costs associated with this contract.
Based on the estimate by Porter, the following services were performed:
Costs
$5,000
15,000
20,000
Research FV Accounting issue
Due diligence for M&A deal
Recommendations for E&Y’s tax audit
Required:
Using the earnings approach:
Completion Date
November 2012
March 2013
October 2013
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a. When should Porter recognize revenues? Please provide your reasoning
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b. Prepare journal entries to recognize revenues pertaining to this contract
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Practice Problem # 4
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1) SOS Corp. is in the business of producing and selling magazine. The magazines are sold on
the basis that a maximum of 35% of the quantity purchased can be returned within 7 months.
SOS has a fairly good historical record of the proportion of magazines returned, on average.
2) SOS Inc. customized limousines for a high-end wedding hall. Just prior to shipping the
customized vehicles, the wedding hall entered creditor protection. Under creditor protection,
customers cannot force payment of their claims until a judge approves a comprehensive plan
for settling the claims of all creditors, a process that can take several years. Since the vehicles
had already been customized and there was little chance of finding an alternate client, SOS
delivered the product, believing that it would be better off in the long run to receive some
payment instead of scrapping the limousines.
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Required: Explain what the critical event is for revenue recognition and how revenues should
be recognized
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Practice Problem # 5
2011
Costs for the Year
Estimated Costs to
Complete
Progress Billings to Date
Cash Collected to Date
2012
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Daley Construction Corporation entered into a contract on January 1, 2011 to construct 5 storage
units for Emmanuel Ltd. The Contract price agreed upon by both parties was $4.75 million. The
data below pertains to the construction period:
2013
1,912,500
2,337,500
650,000
2,337,500
1,750,000
1,550,000
635,000
3,800,000
3,625,000
0
4,750,000
4,675,000
Required:
Using the earnings approach:
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a) Calculate the percentage of completion of the contract at the end of 2012
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b) What is the amount of gross profit that would be reported on the 2012 Income Statement for
this contract?
c) Prepare the journal entry to record the income/loss for 2012
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d) Present the accounts and amounts that would show up on the company's balance sheet at the
end of 2011 and 2012
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Practice Problem # 6
Required:
Cash Collections
as of Dec. 31, 2012
$ 155,000
67,500
195,000
80,000
$497,500
Estimated
Additional Costs to
Complete Contract
$60,000
130,000
-0145,000
$335,000
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Project
#1
#2
#3
#4
Contract Costs
Incurred Through
Dec. 31, 2012
$ 255,000
65,000
175,000
185,000
$680,000
Billings through
Dec. 31, 2012
$ 170,000
67,500
237,500
120,000
$595,000
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Project
#1
#2
#3
#4
Total Contract
Price
$ 300,000
225,000
237,500
300,000
$1,062,500
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SOS Corporation began operations on January 1, 2012, and is looking to choose between the
completed-contract and the percentage-of-completion methods of accounting for long-term
contracts started in 2012. Each of the four contracts listed below are independent of each other;
and any unfinished work is expected to be completed by in 2013. The following information is
available regarding construction-related activities:
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(a) For each of the four projects, calculate the Gross Profit/Loss that would be reported as of
December 31st, 2012 using the:
(i)
Completed-contract method
(ii)
Percentage-of-completion method
(b) Assuming the percentage of completion method, recommend the journal entry to record
Revenue and Gross Profit for Project #2 for 2012.
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(c) Provide the Balance Sheet excerpt for Project #1 as of December 31, 2012
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(d) How would the balances in the accounts discussed in part (c) change, if at all, for Project # 1,
if the completed-contract method is used?
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Practice Problem # 7
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ABC INC, a computer company sells new computer software and warranty support bundled
together. The fair value of the software is $3,000 and the fair value of the warranty is $1,000.
The warranty is valid for a period of 12 months from the date of software purchase. ABC INC
sells both the software and the warranty together for $3,600.
During its first month of sales, 150 units of this software bundle were sold at the discounted
price, and expenses were $70,000.
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Required:
a) Calculate the sale price that should be allocated to each component of the bundle using the
adjusted market assessment approach.
b) Calculate the sale price that should be allocated to each component of the bundle using the
residual approach.
c) Assuming that the relative fair value method is used and income tax rate is 25%, calculate
the net income applicable to ABC’s first month of sales.
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Practice Problem # 8
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XYZ INC sends an magazine to monthly subscribers each month. If the customer does NOT
want the magazine for any given month they can send it back before the end of the month for
free and get a store credit instead. XYZ INC follows ASPE.
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Practice Problem # 9
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In 2021, the following transaction occurred between ABC (Consignor) and XYZ (Consignee)
On March 3, 2021 ABC shipped merchandise costing $104,000 to XYZ. ABC paid $8,000 for
freight and XYZ paid $6,000 for advertising (to be reimbursed by ABC). By September 20,
2021), XYZ advised ABC that all the merchandise has been sold for $140,000, and forwarded
the proceeds (net of a 15% commission and the outlay for advertising) to ABC.
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Required:
a) Prepare all entries for XYZ to account for this transaction.
b) Prepare all entries for ABC to account for this transaction.
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