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Adopted from article ‘Revising for the September 2020 exam session’
On 1 September 20X9, Burnett Co decided to undertake a crowdfunding campaign to finance the production of a new racing bike, the Cracken. They made a short film with famous cyclists which set out the qualities of the Cracken bike and posted it on the PeddleStarter crowdfunding platform. The campaign raised $4 million on which PeddleStarter charged 7% commission. The contributors to the crowdfunding campaign were promised a reward of 1 Cracken bike for every $4,000 dollars contributed. At the financial year end of 31 December 20X9, Burnett Co had manufactured only 50 Cracken bikes at a total cost of $240,000 but none had been delivered to contributors. There was some doubt as to the capability of the company to develop, manufacture, and deliver the bikes promised but Burnett Co is sure that the funding will cover any costs incurred.
The solution to this states revenue recognition upto the extent of costs incurred.
Dr. Bank 4000,000
Cr. Revenue 520,000 ( 240,000 + 280,000 )
Cr. Deferred Revenue $ 3,480,000The solution also states the commission amount of 280,000 to be charged against SPL for the period. (any specific reason ? )
So if SPL is debited by 280,000 what is the corresponding credit ?
The bikes are not delivered as promised, so how is that presented ?
1. Commission has to be paid Dr P&L Cr Cash.
2. If they have not delivered the bikes – tough for the investors – disclose in notes to FS (perhaps).
The article was written during Covid to alleviate the boredom of candidates and raises far more questions than it answers.
Above all, I wouldn’t be stressing about it.
🙂
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