Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AA Exams › Darjeeling Sep Dec 18, Price Promise
- This topic has 3 replies, 2 voices, and was last updated 3 years ago by Kim Smith.
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- December 15, 2020 at 7:16 am #600031
Hello mam, could you please explain to me the accounting for price promise so that it is easier for me to suggest correct procedures as my answer?
What ive grabbed so far is that; initially we credit the sales as they happen and debit receivables… at the year end we make a provision by debitting sales and crediting refund liability
As at the end of the first month after year end, we debit the refund liability and if customers have claimed the price difference then we credit receivables, and if not claimed then we credit revenue?
December 15, 2020 at 8:31 am #600035This provision is no different to any accrual/prepayment – it is an accounting estimate – so doesn’t have to be exact (only “reasonable”) and it doesn’t have to be “reversed” or adjusted to an an actual amount through accounting entries. Any under/over accrual/prepayment will simply “fall out” in the related line item in the SoPL for the following year.
Suppose a company makes sales of $1m a month – i,e. Dr Receivables/Cr Revenue $12m for the entire year – say to a December 2019 y/e.
When a valid claim for a refund under the price promise is received the entries will be Dr Revenue/Cr Receivable (or Cr Cash if the customer had already paid).
At the y/e the company doesn’t know what refunds it will credit to the customers in January based on December sales but it knows that, on average, it is refunding $15,000 a month. So at the y/e: Dr Revenue/Cr Provision $15,000. You should be able to see that this adjustment is effectively deferring the recognition of $15,000 revenue to the following year.
At the following y/e (December 2020) suppose the estimated provision is $20,000 – this will carry forward/defer that amount of revenue to the following accounting period (2021) – but the movement on the provision is only $5,000.
It does not matter how much was refunded to customers in January 2020 – whether it was more or less than $15,000 – it will be actual amounts every month that are accounted for. Only the y/e adjustment needs to be estimated.
December 17, 2020 at 3:24 am #600157Thank you so much mam, you are the best!!!! Thanks a zillion
December 17, 2020 at 7:18 am #600166You are very welcome!
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