Wood Mode Company Is Involved In Design And Manufacturing

Wood Mode Company Is Involved In The Design Manufacture And Installa

Wood-Mode Company specializes in the design, manufacture, and installation of various wood products for large construction projects. Recently, the company completed a significant contract for Stadium Inc., which involved constructing 35 distinct types of concession counters for a new soccer arena under construction. According to the terms of the agreement, upon the counters' completion, Stadium would pay a total of $2,771,000. However, due to an economic downturn, the completion of the arena has been delayed, prompting Stadium to request that Wood-Mode hold the counters at its manufacturing plant until the arena's construction is finished.

Stadium has acknowledged in writing that it ordered the counters and that ownership now resides with them, although the counters are physically held at Wood-Mode's facility. The duration for which Wood-Mode is required to hold the counters depends entirely on the completion of the arena project. Since there have been no additional progress payments due to the delay, Stadium provided a deposit of $579,000, which was received at the time of sale.

This scenario presents important considerations regarding revenue recognition and accounting for customer deposits in accordance with generally accepted accounting principles (GAAP). Specifically, it raises questions about whether the sale is recognized at the time of deposit, when control of the counters transfers, or when the counters are delivered and installed.

In this context, Wood-Mode signed a valid sales contract for the counters and received payment of $579,000 at the time of sale. The appropriate accounting treatment involves recognizing the deposit as a liability until the counters are delivered or the conditions for revenue recognition are met.

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Paper For Above instruction

The accounting treatment of deposits received before the transfer of control of goods is a critical issue for companies involved in manufacturing and sales, especially when storage or hold arrangements are part of contractual obligations. In the case of Wood-Mode, the company received a deposit of $579,000 when the contract was signed, but the counters are to be held until the completion of the infrastructure project. Recognition of revenue and appropriate journal entries depend on the transfer of risk, ownership, and control over the goods.

Under GAAP, revenue recognition generally occurs when a company satisfies its performance obligation by transferring control of the goods to the customer. If the counters are physically held at Wood-Mode's manufacturing facility but legally owned by Stadium, the timing of revenue recognition hinges on the contractual transfer of title and risk. Since Stadium acknowledges ownership, and the counters are designated for its project, the deposit received qualifies as a customer's deposit or advanced payment rather than outright revenue at this stage.

The initial journal entry upon receiving the deposit involves recognizing a liability—such as Customer Deposits or Unearned Revenue—because the counters are not yet delivered or installed, and the earnings process is incomplete. The entry would be:

Debit: Cash $579,000

Credit: Customer Deposits (or Unearned Revenue) $579,000

This entry increases cash and records a liability for the unused deposit. As the counters are eventually installed and the performance obligation is fully satisfied, Wood-Mode will recognize revenue by debiting the liability account and crediting revenue. The timing of this recognition aligns with the completion of the counters and the transfer of control, typically upon installation or delivery, depending on the specific contractual terms and applicable accounting standards.

The situation becomes more complex due to the delayed completion of the project and the company's obligation to hold the counters. If the counters are considered to be 'sold' at the time of contract signing, the deposit is part of the consideration. But until the counters are delivered, GAAP stipulates that revenue should not be recognized fully; instead, the company holds the deposit as a liability until the delivery occurs. This approach ensures compliance with revenue recognition principles, safeguarding against premature recognition of income.

Furthermore, the legal acknowledgment by Stadium of ownership supports the classification of the receipt as a liability rather than revenue at this point. This accounting treatment aligns with the concepts outlined in the Financial Accounting Standards Board (FASB) ASC 606—Revenue from Contracts with Customers— emphasizing the importance of control transfer in revenue recognition.

In conclusion, Wood-Mode's journal entry upon receipt of the deposit should be a debit to Cash and a credit to Customer Deposits or Unearned Revenue, reflecting the company's obligation to hold the counters until completion. Only upon installation or transfer of control should the company recognize revenue, ensuring accurate financial reporting consistent with accounting standards and contractual stipulations.

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References

  • FASB. (2014). ASC 606 - Revenue from Contracts with Customers. Financial Accounting Standards Board.
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