Core 1 – Week 1 Immersive Case
Exhibit – Modern Design Co.
Modern Design Co. (MD)
The following are explanations of the accounting issues as well as the analysis and recommendation to resolve the issue. Also included are the adjustments to the financial statements (Appendix A).
Barbor sofa order
On December 11, MD received an order for a total price of $22,100. Barbor Furniture Ltd. (Barbor) provided a deposit of $9,000 which was recorded as revenue when it was received on December 13. Barbor was not billed until January 2. The order was not shipped until after the year end on January 2. The remaining balance owing was recorded in accounts receivable and sales. The inventory was excluded from the ending inventory count as well. The issue is whether this is the appropriate time to record the revenue or if another time is more appropriate. The other issue is that the balance owing is not a receivable until the product has left the warehouse. The cost of the sofas should also be included in inventory.
According to ASPE 3400, revenue cannot be recognized until:
1. The seller of the goods has transferred to the buyer the significant risks and rewards of ownership, in that all significant acts have been completed and the seller retains no continuing managerial involvement in, or effective control of, the goods transferred to a degree usually associated with ownership.
Not met: MD has not yet provided any goods to the customer, they still owe them an obligation. As such, the couches have not been transferred and the revenue recognition criteria have not been met.
2. Reasonable assurance exists regarding the measurement of the consideration that will be derived from the sale of goods, and the extent to which goods may be returned; and
Met: The deposits have been received and are in accordance with the order.
Based on the analysis of the revenue recognition criteria, the deposit should be removed from the income statement and recorded as deferred revenue. The accounts receivable should also be removed and sales would be reduced as well.
Impact on users
This will increase liabilities, as the deposit will be set up as deferred revenue on the balance sheet and income will decrease. This will increase inventory and decrease cost of sales. Accounts receivable and sales will decrease. The balance sheet and income statement will both be affected.
On December 31, MD purchased lumber costing $4,410 which was received that day; however, it was not included in the inventory count or in accounts payable. The issue is whether the inventory should be included in the December 31, 2014 year end or not until the lumber was put into production in January.
According to ASPE 3031, inventories are assets:
1. Held for sale in the ordinary course of business;
The lumber was ordered, purchased and received on December 31. It is...