Question

Blendit (BLD) manufactures cordless mixers for use in the kitchens of consumers. BLD sells to retailers, which sell the mixers to the ultimate consumer. One of BLD's retail customers is Chef's Toolbox (CTX). On January 1, BLD sells to and receives payment from CTX for 100 cordless mixers with a one-year warranty for $50 each. BLD delivers the mixers to CTX upon receipt of payment, and the warranty is initiated at that time as well by BLD. This warranty provides for a replacement of the mixer if the mixer fails to work properly within one year of the date of purchase. BLD also sells its mixers with no warranty for $40 per unit. The cost to manufacture each mixer is $32.

BLD also provides its retail customers with sales incentives in the form of volume discounts on purchases of mixers with warranties paid at the end of an annual period. The agreement between BLD and CTX provides for the following volume discounts. Additionally, the probability of purchases for each volume level as estimated by BLD is provided based on historical experience and forecasted sales.

Number of mixers purchased	Discount	Probability
Less than 1,000	0.00%	35.00%
1,000 through 1,999	3.75%	40.00%
2,000 or more	10.00%	25.00%

The discounts are retroactive. If 2,000 mixers are purchased during the year, a discount of 10% will be applied to all 2,000 mixers.

Assignment Requirements:

Prepare a professional accounting research memorandum in proper form with reference to the applicable sections of the FASB Codification

Review ASC 606-10-05-04, ASC 606-10-25, ASC 606-10-32-2 through 12, 25 through 31 and ASC 606-10-55-30 through 35.

1. Prepare a detailed professional memo in proper format explaining how each of the of the revenue recognition model’s five steps applies to this transaction. Refer to the proper ASC section in your memo. For any step that is not applicable, just indicate it is not applicable. Otherwise, draw a conclusion regarding the application of each step to the transaction.

2. Using the Journal Entry Template, record all initial accounting entries for BLD for the month of January based on ASC 606. Include references to the guidance to support your proposed accounting. Show any calculations you make to support your journal entries.

Answer 1

Cost to manufacture each mixer	$32
Mixers with no warranty per unit	$40
Sale with one-year warranty	$50
Number of mixers purchased	Avg. Quantity	Discount	Probability	Expected Sales Quantity
Less than 1,000	500	0.00%	35.00%	175
1,000 through 1,999	1500	3.75%	40.00%	600
2,000 or more	2000	10.00%	25.00%	500
			Total	1275
Sale with one-year warranty	($50*1275)	$63,750
Less: Discount @3.75%	(63750*3.75%)	$2,391
		$61,359
Cost to manufacture mixer	(1275*$32)	$40,800
Profit		$20,559

A warranty that can be purchased separately should be accounted for as a separate performance

obligation because the entity promises a service to the customer in addition to the product.

A promised warranty, or a part of the promised warranty, which is not sold separately but provides the customer

with a service in addition to the assurance that the product complies with agreed specifications,

creates a performance obligation for the promised service.

An entity that cannot reasonably separate the service component from a standard warranty should account for

both together as a separate performance obligation.

In accordance with paragraphs 606-10-55-30 through 55-35, that the warranty does not provide the customer

with a good or service in addition to that assurance and, therefore, the entity does not account for it as a performance obligation.

The entity accounts for the assurance-type warranty in accordance with the requirements on product warranties in Subtopic 460-10.

Journal Entry
1	Customer/CTX	Debit	$61,359
	Sales	Credit	$61,359
2	Purchase	Debit	$40,800
	Creditor/ Vendor	Credit	$40,800