Moto Knappy is a producer of automobile motors. The manufacturing process takes a combine of months. The company produces numerous standard and custom models. To simplify this case, assume the motors are sold devoid of a right of return or any warranty of any kind.
Moto Knappy is a publicly traded company headquartered in Lindsey, OK.
Transaction1
Jensen Jalopies assembles cars using various parts which it purchases from suppliers plus some additional parts it manufactures itself. On August 10, 2012, Jensen Jalopies signs a contract to purchase 100 model 357 motors from Moto Knappy. The contract specifies the following:
• The motors will be ready for the delivery on December 20, 2012. Though, Jensen Jalopies has informed Moto Knappy that since its assembly procedure follows just-in-time practices, Jensen Jalopies might delay delivery until it is ready to use the motors. But, the customer should take delivery of all 100 motors no later than March 5, 2013.
• The buy price is $900 per motor. The contract needs a 10% down payment on signing. The remainder of the price is due on December 20, 2012, provided that the 100 motors are ready to deliver.
• Any motors not delivered on December 20 will be stored in Moto Knappy’s warehouse. One of its employees, Tom Wayne, is assigned to go to warehouse once every two weeks and spin the crankshafts on all motors in storage to make sure they are properly lubricated and the internal parts don’t seize. The contract does not reimburse Moto Knappy for any of the cost of storage or Mr. Wayne’s maintenance of the motors.
• If Moto Knappy fails to deliver some of the motors, the buy price for those motors will be refunded.
As of December 15, 2012, Moto Knappy has 100 model 357 motors in inventory. Jensen Jalopies takes delivery of 40 motors on December 20, 2012, 30 motors on January 20, 2013, and the final 30 motors on February 20, 2013. As per the contract, Moto Knappy collects the remainder of the purchase price on December 20, 2012. The model 357 is employed by numerous customers of Moto Knappy; any additional orders for that model are anticipated to be supplied by making new motors, but if a rush order is received, Moto Knappy could use some of its existing inventory to meet the rush order and then build new motors to replenish its inventory.
Transaction2
Moto Knappy enters a contract on September 10, 2012, to sell 50 model 440 motors to the Ayres Autos. The contract specifies the subsequent:
• The motors will be shipped to Ayres Autos at December 15, 2012.
• The buy price is $1,100 per motor. The contract needs a 10% down payment on signing. The remainder of price is payable on delivery. The deposit is refundable if Moto Knappy fails to deliver the motors.
As of December 13, 2012, Moto Knappy has 60 model 440 motors intoinventory. Ayres Autos contacts Moto Knappy with the following information:
“We experienced a fire in our warehouse on December 10. As a result, we can only take delivery of 10 motors at a time till the warehouse is repaired.”
Moto Knappy enters discussions with Ayres Autos, and as a result, the contract is modified (in writing) as follows:
• Ten motors will be shipped to Ayres Autos on December 15, 2012. Ayres Autos will take delivery of remaining 40 motors when it has room or has repaired its warehouse or March 2, 2013, whichever is earlier.
• In the meantime, the remaining 40 motors are sent to Cuccia’s Closet, a local storage facility. The contract with Cuccia’s Closet lists Ayres Autos as the lessee. It permits access by Tom Wayne to spin the crankshafts; Ayres Autos will pay Moto Knappy $50 for each hour that Mr. Wayne spends spinning motors at Cuccia’s Closet. The motors can only be removed from premises by Ayres Autos employees.
• An assurance contract exists covering the motors at Cuccia’s Closet against risk of loss because of fire, theft, or flood. Ayres Autos bought the contract and is the sole beneficiary.
• Moto Knappy collects the remainder of purchase price for all 50 motors on December 15. The initial deposit becomes non-refundable upon shipment of the first 10 motors.
• The revised agreement can’t be unilaterally cancelled by either party.
Required
1. Before diving in the codification, elucidate in basic terms the main concern to be addressed in determining the appropriate revenue recognition pattern for transactions 1 and 2. Use terms that a sophomore in Principles could understand. You are not anticipated to cite the ASC in answering this part, but if you find a passage that is clearly on point, you can.
2. For the transfers to Jensen Jalopies, what is the proper revenue recognition? Incorporate ASC citations in your discussion. Also, provide the journal entries related to revenue or deferred revenue (if any) at August 10, December 15, December 20, January 20, and February 20. You don’t need to worry about journal entries related to the cost of manufacturing the motors or inventory and cost of goods sold.
3. For the transfers to Ayres Autos, what is the proper revenue recognition? Incorporate ASC citations in your discussion. Also, pass out the journal entries related to revenue or deferred revenue (if any) at September 10 and December 15. Also, supposing Ayres Autos took delivery of remaining 40 motors on January 15, what is the entry for that day? You don’t want to worry about journal entries related to the cost of manufacturing the motors or inventory and cost of goods sold.