Solutions_-_Exercises_-_Unit_3 - Financial Accounting I...

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1 Financial Accounting I Grado Administracion de Empresa Exercises
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2 Chapter 3. Revenue recognition Exercise 3.1: Recognising revenues: innovative practices (Problem 10.1; Sutton, 2004, p. 302) Solution to exercise 3.1. (a) Unacceptable. Bulk discounts on vehicle purchases do not represent part of the accomplishments of the van hire company. Bulk discounts on asset purchases should be accounted for as an adjustment to the cost of the assets. The assets should be recorded at fair value which is the purchase price net of the discount. The benefit from the discounts flows into income through lower depreciation charges on the assets in future years. Wrong accounting Dr. vans Cr. Cash Dr. Cash Cr. Revenue Right accounting Dr. vans (net discount) the discount is less value of the purchase.. Cr. Cash (net discount) (b) Recognising licensing income on the date the licensing agreement takes effect is
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3 unacceptable. The biotechnology company should recognise revenue when it has performed the services contracted for, not when it receives cash for them. If these services are performed over an extended period of time, it should recognise revenue on a percentage-of-completion basis assuming the conditions for recognising revenue during the contract’s life have been met. The fact that the company receives payment for these services in advance and these amounts are non-refundable is irrelevant. Such advance payments are a form of financing and reflect the difference in financial strength of the parties to the contract (major pharmaceutical companies are highly profitable and cashrich, many biotechnology companies are loss-making and financially stretched).
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