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Exercises Topic 2: Revenue recognition

2.1 Indiana Company

Indiana Company, a kitchen specialist,

undertook different business transactions in year N1.

However, the head of accounting does not know how to record them in the financial

statements of the company. For each business transaction, propose a consistent solution

(present either the impact on the balance sheet and the income statement or T accounts or

Journal entries).

a)

On 2 December N1, Indiana started the installation of a kitchen for a luxury hotel. The

installation should be finished in February N2. According to the contract with the client,

the selling price is 144,000 € (firm price). On 31 December N1, costs incurred are

30,000 € while estimated total costs are 90,000€. Indiana usually refers to costs incurred

(cost-to-cost method) to determine the percentage of completion.


b)

On 27 December N1, Indiana sold kitchen materials to a client under the following

conditions:

-

Selling Price: 100,000 €

-

Costs of goods sold: 60,000 €

-

Right of return: 12 months (clients are fully refunded in all cases)

-

From previous years, the percentage of goods returned within 12 months of

the delivery is estimated at 15%.


c)

On 31 December N1, Indiana sold kitchen equipment to a state university for 400,000 € (COGS: 240,000 €). According to the terms of the contract, 50% will be paid within 3 months and 50% on 31 December N3, without any explicit financial interest. The client (the state university) usually borrows from banks with & 4% interest rate.

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