International Accounting Problem Set: Revenue Recognition
Please prepare solutions to the following problems, showing your work to receive partial credit for incorrect answers. Each student should submit his or her own solutions.
Q1. Amazing Grace Co. receives a purchase order from Paula Products for $1,000,000 of Goop. The inventory costs associated with the Goop ordered by PP are $150,000. Goop is one of the medical compounds that require special storage, and PP is in the process of building a storage chamber that will comply with those special storage requirements. PP orders the Goop although it is not ready to receive it because it knows Amazing (1) only produces Goop once or twice a year; (2) produced it last in November of 2014; (3) keeps a limited amount of Goop on hand to satisfy orders; and (4) charges a significant premium to schedule a special production run of Goop. PP needs the Goop to produce a new and greatly anticipated medication, and has already scheduled production of the medicine for the beginning of 2015. Amazing and PP sign a contract for the purchase of $1,000,000 of Goop on 12/01/2014. Amazing has sufficient Goop on hand to fill the order, and places it in a special compartment of the storage chamber for PP to pick it up. PP takes out an insurance policy on the Goop, but on December 20 notifies Amazing that the construction of PP's storage facility is running behind schedule, and requests in writing that Amazing hold the Goop until the storage facility is complete and PP can pick it up, sometime in the first quarter of 2015. Amazing agrees to hold the Goop for PP until the storage facility is complete. Give the journal entries required under US GAAP and IFRS to recognize revenue for the sale in 2014.
Q2. Hearth and Home Furnishings (HHF) agrees to sell a bedroom furniture set that includes a matching bedframe, dresser, and night table for $1,500, with no general right of return. The list price of the bedframe is $1,000, the list price of the dresser is $600, and the list price of the night table is $400. The bedframe is delivered 11/15/2014, the dresser is delivered 12/15/2014, and the night table is delivered 1/15/2015. The contract payment terms are $500 due on delivery of each item.
A. How many units of accounting does this contract include under US GAAP and under IFRS?
B. If there is more than one unit of accounting, how should the $1,500 contract price be allocated to the separate units of accounting under US GAAP and under IFRS?
C. How much revenue should be recorded as of each delivery date under US GAAP and under IFRS, given that subsequent payments are contingent on subsequent deliveries?
D. If the delivery order of the units was reversed, how much revenue should be recorded as of each delivery date under US GAAP and under IFRS?
Q3. Clinton Construction Company enters into a contract with expected revenue of $10 million and estimated costs of $8.75 million. A schedule of costs, billings, and cash collections (everything in millions of dollars) for the three years of the contract follows:
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Year 1
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Year 2
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Year 3
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Total
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Costs
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$1.5
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$6.0
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$1.25
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$8.75
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Billings
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1.2
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5.8
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3.0
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10.0
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Cash Collection
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1.0
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4.5
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4.5
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10.0
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Based on surveys of the stage of completion, the contract was 10% complete at the end of year 1, 85% complete at the end of year 2, and 100% complete in year 3. Prepare all necessary journal entries for the three years under the following scenarios.
Scenario I: The company uses IFRS and meets the criteria to use the percentage completion method.
Scenario II: The company uses US GAAP, meets the criteria to use the percentage completion method, and uses the gross profit approach.
Scenario III: The company uses US GAAP and does not meet the criteria to use the percentage completion.
Q4. Weishi Ltd. typically records revenue when both parties to the transaction (Weishi and its customer) have signed a master agreement. In the first quarter of 2014, Weishi entered into a master agreement to provide widgets with a sale price of $10,000. On September 30, Weishi gets a signed purchase order from the same customer to buy $10,000 worth of pinwheels, which also will be covered by the master agreement signed for the widgets. On September 30, the widgets are delivered. Also on September 30, 2014, Weishi is negotiating an amendment to the master agreement to cover the pinwheels, which Weishi believes is a mere formality, and no further material items are under negotiation. On October 5, 2014, Weishi receives from the customer a final, signed copy of the amendment, dated September 30, with no terms materially changed. Weishi signs the agreement as soon as it receives it from the customer.
A. How much revenue should Weishi recognize from these events in the third quarter of 2014 (which ends on September 30) under US GAAP?
B. How much revenue should Weishi recognize from these events in the third quarter of 2014 under IFRS?