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Hello, hope you re in a good day
FR Mock December 2014A transfers some goods to B for $100,000 on 1 July 20X8. The goods are then to be sold by B to third parties at a price included in the contract with A of $110,000 (which is the price that A sells at in the absence of this type of contract), and A is to be notified of the sale. Any goods unsold by 31 December 20X8 can be returned to A for a full refund plus interest at market rates from 1 July 20X8 to 31 December 20X8 on the amount paid for them (currently 3%). B can also choose to keep the goods concerned provided it notifies A on or before 31 December 20X8. This type of transaction has not been entered into between A and B before. At the year end half of the goods have been sold by B to third parties. B has not made any notification to A of any intention to retain any goods unsold by 31 December 20X8. The goods cost A $80,000. Which of the following is the most appropriate accounting treatment in A’s books for the year ended 31 December 20X8?
A.Record $50,000 as sales revenue and accrue interest payable of $1,500
B.Record inventories at $40,000, revenue of $55,000, commissions payable of $5,000 and interest payable $750
C.Record $110,000 of sales revenue, $10,000 of commissions payable
D.Record $100,000 of sales revenuethe answer is B, but i cannot derived calculation to the answer, and in need of the explanation thanks 🙂
Hi,
Cost of goods is $80,000, so even though B holds them they are A’s goods and if half are unsold then the inventory is valued at $40,000.
Similarly, as the other half has been sold then we recognise half of the total $110,000 revenue and so record $55,000.
As the agreement states that the unsold goods can be returned plus 3% interest then the payable of $750 is recorded (3% x [1/2 x 100,000] x 6/12).
A is also due to pay commission on the transaction too. The total comission is $10,000 (110,000 – 100,000) but we only record half of this at 5,000 as only half of the goods have been sold.
Thanks
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