Thunder Corp Makes An Equity Investment Costing $65,000

3 Thunder Corp Makes An Equity Investment Costing 65000 And Classif

Analyze the accounting treatment for an equity investment classified as non-trading, including the appropriate adjusting entries and statement presentation at fiscal year-end. Additionally, examine various revenue recognition scenarios related to different sales transactions and discuss their implications under generally accepted accounting principles (GAAP). Finally, explore specific issues in revenue recognition, such as the classification of sales of demonstration vehicles, the importance of control transfer, realization of revenue, collectability criteria, and the distinction between revenue and gains in financial reporting.

Paper For Above instruction

The management of Thunder Corp has invested $65,000 in a non-trading equity security. At year-end, the fair value of this investment has decreased to $62,000. According to GAAP, investments classified as non-trading, or available-for-sale, are reported at fair value, with unrealized gains or losses recognized in other comprehensive income (OCI). Therefore, Thunder Corp must prepare an adjusting entry to reflect this decline in value.

The appropriate journal entry involves debiting (increasing) a valuation allowance or loss account and crediting the investment account to reflect the decrease in fair value. Specifically, the entry would be:

Debit: Unrealized Loss on Investment (OCI) or a similar account – $3,000

Credit: Investment in Equity Securities – $3,000

This entry decreases the book value of the investment to its fair value of $62,000. In the statement of financial position, the investment is reported under non-current assets, with its fair value disclosed in the notes; the unrealized loss is reported in other comprehensive income, not impacting net income at this stage.

Moving to revenue recognition scenarios, Wage Inc. engages in multiple sales transactions, each requiring different recognition approaches based on the timing of transfer of risks and rewards and the arrangement's specifics. For the first scenario, where goods are sold for $850,000 with immediate payment, revenue is recognized at the point of delivery, when control transfers to the customer. For the second transaction, sold on credit with payment due in 30 days, revenue is also recognized at delivery, provided that the transfer of control has occurred and collection is probable.

The third sale involves installment payments over a period, with a total present value of $445,000 representing the transaction price. Revenue recognition must be based on the satisfaction of performance obligations, typically over time or at point of sale, depending on contractual terms and whether the risks and rewards are transferred immediately or over time. If control is transferred over installments, revenue is recognized proportionally over time; if at a point, then upon delivery.

In analyzing the sale of used cars for demonstration purposes, Roda Company should record the sale of used cars as revenue once control has passed to the customer, typically at the point of sale, assuming other criteria are met. The fact that they were used for demonstration beforehand does not alter revenue recognition upon sale; however, proper classification between revenue and gains is essential to accurately reflect the nature of income in financial statements.

The assertion that revenue has been earned once control has transferred is generally correct, since control indicates the ability to direct the use of and obtain benefits from the asset. Control transfer is often the key criterion for revenue recognition, as it signals the point at which an entity has fulfilled its performance obligation.

Regarding whether sale realization is necessary for revenue recognition, it is important to distinguish between realization and recognition. While realization—meaning the exchange of goods, services, or cash—is essential for recognizing revenue, accounting standards often focus on the transfer of control and the measurement of performance. Recognizing revenue typically requires that it be earned and realizable, but the specific criteria depend on the standards applied.

For contracts to qualify for revenue recognition under the relevant standard, collectability of the sales price must be reasonably assured. This criterion ensures that revenue recognition is not premature and that it reflects the economic substance of transactions.

Finally, the distinction between revenue and gains is vital in financial reporting because it affects how income is presented and interpreted. Revenue arises from core business operations related to the sale of goods and services, providing insight into ongoing performance. Gains, on the other hand, result from incidental transactions such as asset disposals or investments, and their recognition helps to give a true picture of an entity’s core profitability separately from peripheral activities. Proper classification enhances the usefulness and comparability of financial statements for stakeholders.

References

• FASB Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. (2023). Financial Accounting Standards Board.
• FASB ASC 320, Investments—Debt and Equity Securities. (2023).
• Dasler, R. (2020). Financial Accounting and Reporting. McGraw-Hill Education.
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• International Financial Reporting Standards (IFRS) 15. Revenue from Contracts with Customers. (2023). International Accounting Standards Board.
• Revsine, L., Collins, W. W., Johnson, W. B., & Mittelstaedt, J. D. (2015). Financial Reporting & Analysis. Pearson.
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• International Accounting Standards Board (IASB). (2023). IAS 18 Revenue. IFRS Foundation.
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