Question

On 1 January 2019, Entity A sold 100 units of Product X to a customer for...

On 1 January 2019, Entity A sold 100 units of Product X to a customer for $220 per unit payable on 31 December 2019. On the same date, the cash selling price of 1 unit of Product X is $200.  The customer obtained control of the product at contract inception.

However, the contract permits the customer to return the product within 90 days, i.e. on or before 31 March 2019. The product is new and Entity A has no relevant historical evidence of product returns or other available market evidence.

On 31 March 2019, 5 units of Product X was returned.

On 31 December 2019, all outstanding amount was settled.

The cost of 1 unit of Product X to Entity A is $150. The end or reporting period of Entity A is 31 December.

REQUIRED:

Provide journal entries for Entity A from 1 January 2019 to 31 December 2019 in accordance with relevant accounting standards.

ACCOUNT NAMES FOR INPUT:

| Plant | Machine | Motor van | Equipment | Land | Building | Inventory | Intangible assets |

| Bank | Payable | Receivable | Other income | Other expense | Interest expense | Interest revenue |

| Depreciation | Accum. depreciation | Impairment loss | Reversal of impairment loss | Goodwill |

| Loss on disposal | Gain on disposal | Restoration liability | Revaluation surplus | Revaluation deficit |

| Asset for product to be returned | Commission expense | Commission revenue | Revenue |

| Cost of sales | Refund liability | Contract asset | Contract liability | Retained earnings | No entry |

ANSWERS:

Journal Entries:

Date Account Name Debit ($) Credit ($) Hints For Sequence
1-Jan-19 Blank 1 Blank 2
Blank 3 Blank 4 Judge Dr/Cr side
Blank 5 Blank 6 Judge Dr/Cr side
Blank 7 Blank 8 Judge Dr/Cr side
31-Mar-19 Blank 9 Blank 10
Blank 11 Blank 12
Blank 13 Blank 14 Judge Dr/Cr side
Blank 15 Blank 16 Judge Dr/Cr side
Blank 17 Blank 18 Judge Dr/Cr side
Blank 19 Blank 20 Judge Dr/Cr side
31-Dec-19 Blank 21 Blank 22
Blank 23 Blank 24 Judge Dr/Cr side
Blank 25 Blank 26 Judge Dr/Cr side
Blank 27 Blank 28 Judge Dr/Cr side

Homework Answers

Answer #1

As per accounting standard on Revenue from contracts with customers, an entity shall recognise the following for the accounting of transfer of products with a right to return-

1) revenue for the transferred products in the amount of consideration to which the entity expects to be entitled or in simple words, revenue should not be recognised for the products which are expected to be returned.

2) a refund liability

3) an asset a(a corresponding adjustment to the cost of sales) for its right to recover the products from the customers on settling the refund liability.

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