Presented below are three revenue recognition situations. (a) Groupo sells goods to MTN for $920,000, payment due at delivery. (b) Groupo sells goods on account to Grifols for $809,000, payment due in 30 days. (c) Groupo sells goods to Magnus for $522,000, payment due in two installments, the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is $484,700. Indicate the transaction price for each of these situations and when revenue will be recognized.

Please refer to the explanation section

Explanation:

Revenue should be recognized when it is earned rather than when the company receives payment. Recognising revenue when it is earns complies with the matching principle. Revenue should be recognized in the period it is earn regardless of whether cash as been received or not.

a. Groupo sells goods for $920 000, payment due on delivery

Groupo should recognize revenue immediately the sale is finalised. The Seller Groupo and the buyer MTN have entered into a sale agreement that give rise to obligations for each party. Groupo has a obligation to Deliver the Goods to MTN and MTN has an obligation to pay for the Goods upon Delivery. Revenue is earned as soon as the sale finalised and should be recognized immediately

b. Groupo sells good on account for $809 000

Groupo should recognize revenue when the sale is finalised in other words Groupo should recognise revenue when it is earn not when the Payment is received in 30 days. The Payment that will be received in 30 days will affect bank and account receivable

c Groupo sells goods to Magnus for $522,000, payment due in two instalments, the first instalment payable in 18 months and the second payment due 6 months later.

The revenue should be recognised in the current period at $484700 which is the present value. The sale took place in the current period therefore revenue should be recognized in the current period in order to be match with corresponding costs (cost of sales for example).The difference between $522000 and $484700 would be recognised as interest income (interest on revenue)

one of the appeals of a sole proprietorship is that business expenses are kept separate from your personal income tax return

the answer is a.

by: nicholas dooley