Revenue Recognition and Preparation of Income Statement
Richmond Company manufactures and sells robot type toys for chil Dr. en. Under one type of agreement with the dealers, Richmond is to receive payment upon shipment to the dealers. Under another type of agreement, Richmond receives payments only after the dealer makes the sale. Under this latter agreement, toys may be returned by the dealer. Richmond’s president desires to know how the income statement would differ under these two methods over a 2 year period.
The following information is made available for making the computations:
|
Sales price per unit: |
|
|
If paid after shipment |
$5 |
|
If paid after sale, with right of return |
$6 |
|
Cost to produce per unit (assume fixed quantity of toys is produced) |
$3 |
|
Expected bad debt percentage of sales if revenue recognized at time of shipment |
5% |
|
Expected bad debt percentage of sales if revenue recognized at time of sale |
1/2% |
|
Selling expenses—2008 |
$25,000 |
|
Selling expenses—2009 |
$15,000 |
|
General and administrative expenses—2008 and 2009 |
$22,000 |
|
Quantity Shipped and Sold |
||
|
|
2009 |
2008 |
|
Units shipped to dealers |
30,000 |
25,000 |
|
Units sold by dealers |
22,000 |
14,000 |
Instructions:
1. Prepare comparative income statements for 2008 and 2009 for each of the two types of dealer agreements assuming the company began operations in 2008.
2. Discuss the implications of the revenue recognition method used for each of the dealer agreements.