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