Question

Kelly Ltd. offers all its customers a rebate of $0.50 per unit on each and every unit purchased in the year if they buy more than 100,000 units in a calendar year. In 2020, Purchase Corp. has already purchased 110,000 units by September 30, 2020. Purchase Corp. has a September 30 year end. Kelly Ltd. Calculates and pays any rebates in January of the subsequent year.

Required:

1. Prepare the entry, if necessary, that Purchase Corp. should record if it is preparing 2020 annual financial statements assuming that, of the 110,000 units purchased, 30,000 units are still on hand on September 30.
2. Prepare the entry, if necessary, assuming that Buyer has only purchased 30,000 units in the first 9 months. 7,000 units remain on hand.
3. Prepare the entry, if necessary, assuming that Buyer has only purchased 90,000 units in the first 9 months. 8,000 units remain on hand.
4. Identify the accounting issue with both requirements (a), (b), and/or (c). Explain why you made an entry in requirements (a),(b), and/or (c), or why you did not make an entry in relation to the accounting issue.

Answer 1

	Date	Accounts Titles	Debit	Credit
	2020
(a)	Sep 30	Kelly Ltd (110,000 x 0.50)	55,000
		........Cost of goods sold (80,000 x 0.50)		40,000
		.........Inventory (30,000 x 0.50)		15,000
(b)		NO ENTRY
(c)		NO ENTRY

.

(d) Rebate will be given if the purchases of more than $100,000 are made and since $100,000 hasn't been reached in the 9 months, no adjustement will be made. But, Purchase Corp is still eligible for Rebate if it corsses the amount in the remanining 3 months. Suppose in case (c) , Purchase Corp, purchases $120,000 till Dec 31, 2020. Then Journal Entry on Dec 31, 2020 will be made to record the effect.

Accounting issue is Contingency: In Accounting, contingency is not recorded, just shown below the books according to the materiality concept.