Question

Vanguard Corporation is an automobile manufacturer. SUV has an unused piece of manufacturing equipment in one of its factories (i.e., a capital asset). Vanguard has been approached by SUVLtd., who would like to purchase the equipment. No contract has been signed, no money has been received from SUV, and the equipment is still located in Vanguard’s factory. Since this is a sale of a plant asset, not of inventory, the plant’s Manager feels that the revenue recognition principle doesn’t apply, and that the sale of the asset can be recorded.

What is your response to the Manager’s request?

Answer 1

As per question, Vanguard has been approached by SUV for purchase of a capital asset.

As per Accounting principles, as no valid contract has been signed , it signifies that the sale of equipment is in negotiation / discussion stage and also as no money has been recieved it also validates the point that the SUV has expressed an interest to buy and the terms of sales are yet to be agreed upon.

As the terms are yet to be agreed upon , agreements are yet to be entered, the plant's managers contention is not justified and the sale of the asset cannot be recorded in the books of the company