Question

QUESTION 2

1. Part II:
   Background
   MU just developed new universal titanium replacement mixer blades. These replacement blades can be used in most mixers currently on the market. MU is selling these blades with a right of return for 30 days. On January 15, management believes it is probable that 10% of the titanium blades sold will be returned. This belief is based on significant experience in estimating returns on other mixer blades MU has developed and sold in the past. MU estimates the cost of processing any returned blades will be insignificant. On January 15,KH purchases and pays for 40 blades at a cost of $20 each. The cost to manufacture each blade was $14. On January 31, MU’s assessment of potential returns had not changed from its assessment on January 15.
   Requirements:
   ►      Review ASC 606-10-55-22 through 28. Prepare a detailed explanation of each of the five steps of revenue recognition. Record all initial accounting entries for MU for the month of January based on guidance on revenue recognition in ASC 606. Include references to the guidance to support your proposed accounting. Show any calculations you make to support your journal entries.

Answer 1

Steps of Revenue Recognition:

1. Identification of contract with the customer.
2. Identification of any performance obligation in the above-mentioned contract.
3. Determination transaction price.
4. Allocation of the transaction price to the performance obligations stated in the above-mentioned contract.
5. Recognition of revenue when the entity satisfied the performance obligations.

Journal Entries:-

Date	Particulars		Debit	Credit
15-Jan	Accounts Receivable A/c	Dr	800
	To Sales A/c			800
	(40 blades x 20)
15-Jan	COGSA/c	Dr	560
	TO Inventory A/c			560
	(40 blades x 14)
31-Jan	Sales A/c	Dr	80
	To Accounts Receivable A/c			80
	(40 blades x 10% x 20)
31-Jan	Inventory A/c	Dr	56
	To COGS A/c			56
	(40 blades x 10% x 14)