Don January 1, 2017 Carly Fashions Inc Enters Into A Contrac

Don January 1, 2017 Carly Fashions Inc Enters Into A Contract With

On January 1, 2017, Carly Fashions Inc. enters into a contract with a regional retail company to provide 500 blouses for $20,000 over the next 10 months. On September 1, 2017, after 400 of the blouses had been delivered (50 blouses per month), the contract is modified.

1. Fifty blouses were delivered each month for the first 8 months of 2017. Prepare Carly Fashions’s monthly journal entry to record revenue.

2. Assume that the contract is modified on September 1 to sell, once the original 500 blouses are delivered, an additional 100 blouses at $35 per blouse, which is the stand-alone selling price on October 1, 2017. The additional blouses are to be delivered in November. Prepare the November journal entry to record the contract modification.

3. Assume instead that the contract is modified on September 1 to alter the price of the additional 100 blouses to $35 per blouse, which is the stand-alone selling price on October 1, 2017. Assume the blouses are delivered evenly on September 1 and October 1, 2017. Prepare the journal entries for September and October to record this contract modification.

Paper For Above instruction

Introduction

The accounting for revenue recognition under contracts with customers is governed by the principles outlined in the IFRS 15 and ASC 606 standards. These standards require entities to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled. This paper examines the case of Carly Fashions Inc., which entered into a contractual agreement to supply blouses, and analyzes the appropriate journal entries under different scenarios of contract performance and modification.

Scenario 1: Monthly Revenue Recognition for the Initial Contract

Under the original contract, Carly Fashions committed to delivering 500 blouses for a total consideration of $20,000 over ten months. The delivery schedule resulted in 50 blouses being delivered per month for the first eight months of 2017. Recognizing revenue in each month would involve allocating the transaction price to each performance obligation and recognizing revenue proportionally as each is satisfied.

Since the contract involves delivering a specified quantity of goods over time, Carly Fashions would recognize revenue monthly based on the number of blouses delivered and the proportionate share of the total consideration. The monthly journal entry would reflect the transfer of control to the customer and the recognition of revenue accordingly.

The standard approach involves calculating revenue per blouse: $20,000 / 500 blouses = $40 per blouse. Each month, 50 blouses are delivered, corresponding to revenue recognition of 50 x $40 = $2,000 per month. The journal entry on each month would be:

Monthly Journal Entry:

  • Debit: Accounts Receivable $2,000
  • Credit: Revenue $2,000

This pattern would continue each month through August, resulting in total revenue of $16,000 recognized over the first eight months, with the remaining $4,000 to be recognized upon delivering the remaining 100 blouses in subsequent months.

Scenario 2: Contract Modification for Additional 100 Blouses (November Delivery)

On September 1, 2017, the contract was modified to include an additional 100 blouses to be sold at a stand-alone price of $35 per blouse, with delivery scheduled for November. The modification affects revenue recognition, as it alters the scope and possibly the transaction price.

Given the stand-alone price of $35 per blouse, Carly Fashions must determine the appropriate allocation of the transaction price between the original goods/services and the new obligation. Using the guidance of IFRS 15 and ASC 606, the modified transaction price would generally be allocated based on the relative standalone selling prices.

The original obligation is to deliver 500 blouses for $20,000, with 400 already delivered by September 1. The new obligation involves delivering 100 additional blouses at $35 each, totaling $3,500. The revised total consideration is the original $20,000 plus $3,500 for the new obligation, summing to $23,500.

The allocation of the transaction price between the initial and modified obligations would be proportional based on standalone prices. The $20,000 for 500 blouses equates to $40 per blouse initially, but now the additional blouses are worth $35 each, which may reflect a different valuation. The total standalone prices are 500 blouses at $40 and 100 blouses at $35, totaling $21,500.

Thus, the allocated transaction price for the original obligation becomes:

  • 500 blouses at $40: (500 / 600) * $23,500 = approximately $19,583

Similarly, the additional 100 blouses are allocated: (100 / 600) * $23,500 = approximately $3,917

The revenue recognized for the original 400 blouses delivered by September 1 would be proportional, and the remaining revenue for the unshipped portion would be deferred until delivery.

In November, upon delivering the additional 100 blouses, Carly Fashions would recognize revenue based on the allocated transaction price. The journal entry in November to recognize revenue for the delivered goods would be:

  • Debit: Accounts Receivable $3,917
  • Credit: Revenue $3,917

Scenario 3: Price Adjustment for Additional Blouses Delivered Evenly in September and October

In this scenario, the contract modification alters the price of the additional 100 blouses to $35 per blouse, and the delivery is spread evenly on September 1 and October 1, 2017. This requires recognizing revenue at different points and based on the proportionate delivery and price.

Given the stand-alone price of $35 per blouse, and the delivery happening in two equal installments, Carly Fashions would recognize revenue accordingly. The total value of the additional 100 blouses at $35 each is $3,500, which will be recognized proportionally as the goods are delivered.

On September 1, the company delivers 50 blouses, which are valued at $35 each, totaling $1,750. Therefore, the journal entry to recognize revenue at that point would be:

  • Debit: Accounts Receivable $1,750
  • Credit: Revenue $1,750

Similarly, on October 1, when the remaining 50 blouses are delivered, an identical journal entry would be made:

  • Debit: Accounts Receivable $1,750
  • Credit: Revenue $1,750

This approach ensures revenue recognition aligns with the timing of control transfer, consistent with lease accounting standards and principles of revenue recognition.

Conclusion

Proper revenue recognition under contractual modifications requires careful analysis of the scope, timing, and standalone selling prices of goods and services involved. In Carly Fashions Inc.'s cases, the adjustments on September 1 necessitate using the proportional allocation method based on standalone prices and timing of delivery to ensure accurate and compliant financial statements. The detailed journal entries exemplify the application of IFRS 15 and ASC 606 standards in practice, demonstrating the importance of systematic and consistent accounting treatment for complex contractual arrangements.

References

  • FASB Accounting Standards Codification. (2023). Revenue Recognition (Topic 606).
  • International Financial Reporting Standards (IFRS) Foundation. (2014). IFRS 15 Revenue from Contracts with Customers.
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  • IASB. (2014). IFRS 15 Revenue from Contracts with Customers. International Financial Reporting Standards.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory and Analysis. Wiley.
  • Graham, J. R., & Harvey, C. R. (2001). The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 60(2-3), 187–243.
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  • PricewaterhouseCoopers. (2020). Revenue from contracts with customers: The new standard. PwC Reports.

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