Question

1. In late December 2019 Universal made a large shipment of Ridgeback Man comics to an eastern Canada comic book chain. Universal had been in contract negotiations with the customer for some time and the final agreement was an important step in its planned expansion into eastern Canada. The customer has an excellent credit rating and payment for the shipment was received in full, on time, on January 10, 2020. Because Ridgeback Man primarily solved his cases in the city of Toronto, being able to reach a new fan base in eastern Canada would be critical to taking the comic national and subsequently international. Given the uncertainty of success, Universal offered a full refund any time up to July 30, 2020 to the comic book chain. Universal recognized the revenue for the sale when the comics were shipped, as is its policy. Total revenues realized was $100,000 with a gross margin of $25,000.

2. In 2018 Universal released a new female super hero called Misty Waters with the ability to manipulate water. The comics were not well received and as a result the comic was discontinued. Currently there are $18,000 remaining in inventory of the comics that has not been sold since the end of 2018. Mr. Stee believes that in 10 to 15 years these comics will become a collector’s item so he has kept them in inventory. Furthermore the creators have considered a marriage between Misty Waters with Ridgeback Man which might renew interest in the character.

What is the appropriate accounting measures to be taken to report these situations?

Answer 1

Trail balance as of July 30, 2020

Cost of good sold = Sales revenues - Profit

Cost of good sold = $ 100,000 - $ 25,000 = $ 75,000.

The opening inventory balance 2020 will be the closing balance of 2018 as no sales took place as of 2019.

Note: Currently, there are $18,000 remaining in an inventory of the comics that have not been sold since the end of 2018. Mr. Stee believes that in 10 to 15 years these comics will become a collector’s item so he has kept them in inventory.

Account Title	Amount
Opening balance	$       18,000
Cost of goods sold	$       75,000
Purchase	$       57,000

Purchase of the year 2020 is cost of good sold less opeing balance. $ 75,000 - $ 18,000 = $ 57,000

Purchase = $ 57,000.

Gross profit is equal to net profit due to expeting other expencess is zero.

Net profit july 30, 2020 = $ 25,000.

Income statement as on July 30, 2020

Income Statement
Account Title	Amount
Sales	$    1,00,000
Cost of sales	$       75,000
Profit & Loss	$       25,000
Net Profit	$       25,000