INTERPRETING FINANCIAL STATEMENT DISCLOSURES RELAT- ING TO INCOME RECOGNITION. Deere & Company manufactures agricultural and industrial equipment and provides financing services for its independent dealers and their retail customers. In recent notes to the financial statements, Deere discloses the following:
Note 1: Deere recognizes income from equipment sales for financial reporting at the time of shipment to dealers. Provisions for sales incentives to dealers, returns and allowances, and uncollectible accounts are made at the time of sale. There is a time lag, which varies based on the timing and level of retail demand, between when Deere records sales to deal- ers and when dealers sell equipment to retail customers. Deere recognizes income from equipment sales using the installment method for tax reporting.
Note 2: Deere provides financing to independent dealers and retail customers for Deere products. Accounts and notes receivable appear net of unearned finance income. Deere recognizes the unearned finance income as finance revenue over the period that dealer and customer notes are outstanding.
Required
a. Using the criteria for revenue recognition, justify Deere's timing of revenue recognition for its equipment sales. Consider why recognition of revenue earlier or later than the time of shipment to dealers would not be more appropriate.
b. Describe briefly how the balance sheet accounts of Deere & Company listed here would change if it recognized revenues during the period of production using the percentage-of-completion method. You do not need to give amounts, but indicate the likely direction of the change and describe the computation of its amount.
• Accounts and Notes Receivable
• Inventories
• Retained Earnings
c. Respond to Part b assuming that Deere & Company recognized revenue using the installment method.
• Accounts and Notes Receivable
• Inventories
• Retained Earnings.