Question

Coronado Ranch & Farm is a distributor of ranch and farm equipment. Its products include small tools, power equipment for trench-digging and fencing, grain dryers, and barn winches. Most products are sold direct via its company Internet site. However, given some of its specialty products, select farm implement stores carry Coronado’s products. Pricing and cost information on three of Coronado’s most popular products are as follows.

Item		Stand-Alone Selling Price (Cost)
Mini-trencher		$3,000	($1,720)
Power fence hole auger		1,032	($688)
Grain/hay dryer		12,555	($9,460)

On January 1, 2020, Coronado sells augers to Mills Farm & Fleet for $41,280. Mills signs a six-month note at an annual interest rate of 12%. Coronado allows Mills to return any auger that it cannot use within 60 days and receive a full refund. Based on prior experience, Coronado estimates that 5% of units sold to customers like Mills will be returned (using the most likely outcome approach). Coronado’s costs to recover the products will be immaterial, and the returned augers are expected to be resold at a profit. Prepare the journal entries for Coronado on January 1, 2020.

Account Title and Explanation	Debit	Credit
January 1, 2020
Notes Receivable (Mills)	$         41,280.00		Given
Refund Liability (5% * $41,280)		$           2,064.00	Units Return liability
Sales Revenue		$         39,216.00	Balance
(To Record the Sales)
Cost of Goods Sold	$         26,144.00		Balance
Estimated Inventory Returns (40 * $688 * 5%)	$           1,376.00		Units Return liability
Inventory (40 * $688)		$         27,520.00
(To Record the Cost of Goods Sold)
* Total sale	$         41,280.00
Sale price	1032
Units(total sale/sale price)	40

On August 10, 2020, Coronado sells 14 mini-trenchers to a farm co-op in western Canada. Coronado provides a 4% volume discount on the mini-trenchers if the co-op has a 15% increase in purchases from Coronado compared with the prior year. Given the slowdown in the farm economy, sales to the co-op have been flat, and it is highly uncertain that the benchmark will be met.

Prepare the journal entries for Coronado on August 10, 2020.

Date	Account Titles and Explanation	Debit	Credit
August 10, 2020
	(To record cash sale)
August 10, 2020
	(To record cost of goods sold)

Answer 1

This scenario is related to the variable consideration involved in ascertaining the amount of revenue to be recognized.

An entity shall include in the transaction price some or all of the amount of variable consideration only to the extent that it is highly probable that significant reversal in the amount of cummulative revenue recognised will not occur when the uncertainity associated with variable consideration is subsequently resolved.

In the current scenario, 4% discount to be given in future on satisfaction of condition is in the nature of varible consideration i.e. whether this 4% discount will be reduced from transaction price or not.

However as per slow down in the farm economy and flat sales made to co-op, it is highly uncertain that co-op sales will increase by 15% from previous year. And thus, significant reversal in revenue will not occur and revenue to be recognised at full transaction price without adjusting discount.

Journal entry for the same would be as follows-

August 10, 2020

Cash. DR $42,000

Sales revenue. CR $42,000

( To record cash sales)

Cost of goods sold. DR $24080

Inventory. CR $24080

(To record cost of goods sold)