Amprint Assignment Chapter 18 New FASB Update Falsepa

101114 456 Amprint Assignment Chap 18 New Fasb Update Falsepa

Prepare journal entries for various transactions involving sales, contracts, and revenue recognition following the updated FASB guidelines. The assignments include recording sales, installment payments, returns, and estimating transaction prices based on probabilities and standalone values, with adjustments for uncertainties and rebates. The journal entries should accurately reflect revenue recognition principles, cost of goods sold, and receivables, based on the provided scenarios and given data.

Sample Paper For Above instruction

Introduction

The revenue recognition standards under the Financial Accounting Standards Board (FASB) updates emphasize the importance of accurately capturing sales transactions, including considerations for returns, rebates, installment payments, and estimated transaction prices. Adherence to these standards ensures that financial statements faithfully represent a company's economic activities. This paper explores the application of these principles through detailed journal entries for various transactions, illustrating contemporary best practices under the current accounting framework.

Case Study 1: Sale with Delivery and Payment Schedule

In the first scenario, Cosmo Co. enters into a merchandise contract with Greig Inc., with delivery occurring before the payment. The initial journal entry on May 10, 2014, recognizes the sale, assuming revenue is recognized at the point of delivery due to transfer of control. The sale is recorded at the contract price of $2,000, with a corresponding cost of goods sold (COGS) of $1,300. The initial entry reflects the expectation of eventual cash receipt but does not recognize cash until payment is received on July 15, 2014. Subsequently, on June 15, 2014, the delivery is recorded, which increases revenue and decreases inventory. Finally, on July 15, 2014, the receipt of cash is recorded, closing the revenue cycle for this transaction.

Journal Entries:

  • May 10, 2014:
  • Debit Accounts Receivable $2,000
  • Credit Sales Revenue $2,000
  • June 15, 2014:
  • Debit Cost of Goods Sold $1,300
  • Credit Inventory $1,300
  • July 15, 2014:
  • Debit Cash $2,000
  • Credit Accounts Receivable $2,000

Case Study 2: Handling Rebates Based on Sales Volume

Manual Company's scenario involves offering rebates based on cumulative sales volume, which complicates revenue recognition. Given the first quarter sales of 11,000 units at $110,000, and knowing from past experience that total sales typically exceed 40,000 units, the company must estimate the rebate percentage applicable and the resulting reduction in revenue.

The rebate structure offers discounts based on sales volume: 2% for 10,000 units, 4% for 20,000 units, and 6% for 30,000 units. Since sales are only 11,000 units in the quarter, and prior experience indicates total sales will surpass 40,000, the company should recognize revenue net of the estimated rebate based on the most probable rebate percentage—here, likely the 4% for exceeding 20,000 units, but less than 30,000 units.

Journal Entry:

  • Debit Accounts Receivable $110,000
  • Credit Sales Revenue $105,600
  • Credit Rebate Payable $4,400

(Calculation: $110,000 - 4% rebate = $105,600)

Case Study 3: Custom Window Sales and Installation Services

Geraths Windows sells custom storm windows and provides optional installation services. The transactions on July 1 involve delivery of the windows and recognition of revenue for the windows alone, considering the installation is a separate performance obligation. The fair value of installation services, estimated at $600, adjusts how the transaction price should be allocated.

Initially, upon delivery, Geraths recognizes revenue for the windows at their standalone selling price, which is $2,000, with a cost of $1,100. The remaining amount allocated to installation ($600) is deferred until the installation is completed on October 15, 2014. The journal entries should reflect this separation:

  • July 1, 2014:
  • Debit Accounts Receivable $2,000
  • Credit Revenue - Windows $1,400
  • Credit Unearned Revenue - Installation $600
  • September 1, 2014 (delivery):
  • No additional entry needed, as revenue was recognized at delivery for the windows.
  • October 15, 2014 (installation completion):
  • Debit Unearned Revenue - Installation $600
  • Credit Revenue - Installation $600

For scenarios involving estimating the standalone value of installation based on cost plus a margin, the approach involves estimating the standalone selling price (cost + 20% margin) at $400 + 20% = $480, and then allocating revenue proportionally based on these standalone prices.

In cases where Geraths cannot develop a reliable estimate of the fair value of installation due to uncertainty, the entire transaction may be recognized as a single performance obligation upon delivery, deferring recognition of the installation revenue until completed, or recognizing revenue only at the point of delivery if the service is highly uncertain.

Revenue Recognition for Returns and Refunds

Amodt Music's scenario involves recognizing revenue from sales of CDs with a return policy. The company records sales at the time of shipment, estimating the return liability based on historical return rates (15%) and the actual returns received. On October 11, 2014, with $78,000 in returns, Amodt records a refund liability and adjusts sales revenue accordingly, ensuring that the net revenue reflects the expected net cash inflows after returns.

Journal Entries:

  • July 10, 2014:
  • Debit Accounts Receivable $700,000
  • Credit Sales Revenue $700,000
  • Debit Cost of Goods Sold $560,000
  • Credit Inventory $560,000
  • October 11, 2014:
  • Debit Refund Liability $78,000
  • Credit Accounts Receivable $78,000

Estimating Transaction Prices with Probabilities

Kristin Company’s example involves products sold at $20 each with a 30-day return window, allowing for full refunds. Using probability-weighted analysis, Kristin estimates that 10 units will be returned, which impacts the total revenue recognized initially. The appropriate journal entry at the sale time accounts for expected returns, reducing recognized revenue and establishing a refund liability.

Journal Entry:

  • Debit Accounts Receivable $6,000
  • Credit Sales Revenue $5,700
  • Credit Refund Liability $300

Cost of goods sold is also adjusted based on expected returns.

Revenue from Construction Contracts and Performance Bonuses

Nair Corp. evaluates the transaction price based on likelihood of project completion by specific dates, including performance bonuses linked to timely completion. When estimating that the probability of completing by August 1, 2015, is 70%, and considering expected bonuses, Nair recognizes a proportionate amount of revenue accordingly. If Nair cannot reliably estimate whether the project will meet the deadlines, revenue recognition should be deferred or recognized upon project completion.

Recording Sale with Uncertain Completion:

  • Debit Accounts Receivable $1,000,000
  • Credit Revenue $700,000 (assuming 70% probability)

And for the bonus part, revenue is adjusted based on the estimated probability of earning the bonus, and the transaction price includes the probable bonus amount.

Accounting for Zero-Interest Notes

Adani Inc. sells goods to Geo Company with a zero-interest note, requiring present value calculations. The present value of the note (about $10,000) is recognized as receivable, and the difference (interest revenue) is deferred over the note's term.

Journal Entry:

  • Debit Notes Receivable $10,000
  • Debit Discount on Notes Receivable $1,000
  • Credit Sales Revenue $11,000

This reflects the instrument’s fair value and the resulting discount, which amortizes over the note’s term, recognizing interest income.

Conclusion

The updated FASB standards require careful analysis of the transaction's performance obligations, estimation techniques, and recognition timelines. The journal entries discussed exemplify best practices in recording revenues, costs, receivables, and liabilities, ensuring compliance and transparent financial reporting. Proper application of these principles promotes accurate reflection of economic reality, enhances comparability, and maintains the integrity of financial statements in accordance with current accounting standards.

References

  • FASB. (2014). Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. Financial Accounting Standards Board.
  • Horngren, C. T., Datar, S., Rajan, M. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
  • Kieso, D., Weygandt, J., Warfield, T. (2019). Intermediate Accounting (16th ed.). Wiley.
  • Leitner, B. (2019). Revenue Recognition: Ensuring Proper Financial Reporting. Journal of Accountancy, 227(4), 45–50.
  • Meigs, R. F., Meguiar, J. P., Shotwell, P. (2018). Financial Accounting. McGraw-Hill Education.
  • Rittenberg, L., Johnstone, K., Gramling, A. (2019). Auditing and Assurance Services. Cengage Learning.
  • Schneider, M. (2020). Revenue Recognition and the New Revenue Standard. CPA Journal, 90(3), 40–45.
  • Schroeder, R. G., Clark, M. W., Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
  • Whittington, G., Gwilliam, D. (2020). Principles of Auditing & Other Assurance Services. Pearson.
  • Zimmerman, J. L., Weygandt, J. J., Kieso, D. E. (2020). Financial Statement Analysis. Wiley.

Related Assignments