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Hi P2 tutor! I need help with this question on specialized entity:
You are the accountant of a hotel which has recently encountered staffing problems, resulting in a sub-standard service being provided to guests. The hotel received numerous complaints and management responded by offering partial refunds or free drinks at the hotel bar to guests. These were offered as a goodwill gesture.
As at year end of 30 June 2010, an amount of $30,000 was refunded back to the guests and the cost of $10,000 free drinks was given out.
Discuss how the 2 forms of ex-gratia compensation to hotel guests should be accounted for.
I really have no idea! I could guess ( but it IS a guess ) that both should be included within cost of sales. The refunds would be Dr sales and Credit cash
the free drinks would not actually be recorded but rather they would be dealt with by including the cost of the drinks within purchases, and therefore in cost of sales. The valuation of closing inventory would clearly NOT include the drinks because they are no longer physically in inventory. This omission from inventory means that the cost of purchase HAS been included whereas the value is not included as a deduction in arriving at thhe cost of sales.However, I stress that this is a guess!
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