Question: Revenue recognition Mixer Up
Part I: Mixer Up (MU) manufactures cordless mixers for use in the kitchens of consumers. MU sells to retailers, which sell the mixers to the ultimate consumer. One of MU's retail customers is Kitchen Hardware (KH). On January 1, MU sells to and receives payment from KH for 100 cordless mixers with a one-year warranty for $50 each. The mixers are delivered by MU to KH upon receipt of payment and the warranty is initiated at that time as well by MU. This warranty provides for a replacement of the mixer if the mixer fails to work properly within one year of the date of purchase. MU also sells its mixers with no warranty for $40 per unit. The cost to manufacture each mixer is $32.
MU also provides its retail customers with sales incentives in the form of volume discounts on purchases of mixers with warranties paid at the end of an annual period. The agreement between MU and KH provides for the following volume discounts. Additionally, the probability of purchases for each volume level as estimated by MU is provided based on historical experience and forecasted sales.
The discounts are retroactive. If 2,000 mixers are purchased during the year, a discount of 10% will be applied to all 2,000 mixers.
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Number of mixers purchased
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Discount
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Probability
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Less than 1,000
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0%
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40%
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1,000 through 1,999
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5%
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40%
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2,000 or more
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10%
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20%
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Requirements: • Review ASC 605-10-25, ASC 605-20-25 and ASC 605-50-25. Record all initial accounting entries for MU for the month of January based on the current guidance on revenue recognition in ASC 605. Include references to the guidance to support your proposed accounting. Show any calculations you make to support your journal entries.
• Review ASC 606-10-05-04, ASC 606-10-25, ASC 606-10-32-2 through 12, 25 through 31 and ASC 606-10-55-30 through 35. Prepare a detailed explanation of each of the five steps for revenue recognition. Record all initial accounting entries for MU for the month of January based on the new guidance on revenue recognition in ASC 606. Include references to the guidance to support your proposed accounting. Show any calculations you make to support your journal entries.
Part II: Revenue recognition Mixer Up
Part I should be completed before beginning Part II.
Background: MU just developed new universal titanium replacement mixer blades. These replacement blades can be used in most mixers currently on the market. MU is selling these blades with a right of return for 30 days. On January 15, management believes it is probable that 10% of the titanium blades sold will be returned. This belief is based on significant experience in estimating returns on other mixer blades MU has developed and sold in the past. MU estimates the cost of processing any returned blades will be insignificant. On January 15, KH purchases and pays for 40 blades at a cost of $20 each. The cost to manufacture each blade was $14. On January 31, MU's assessment of potential returns had not changed from its assessment on January 15.
Requirements: • Review ASC 605-15-25. Record all initial accounting entries for MU for the month of January based on the current guidance on revenue recognition in ASC 605. Include references to the guidance to support your proposed accounting. Show any calculations you make to support your journal entries.
• Review ASC 606-10-55-22 through 28. Prepare a detailed explanation of each of the five steps of revenue recognition. Record all initial accounting entries for MU for the month of January based on the new guidance on revenue recognition in ASC 606. Include references to the guidance to support your proposed accounting. Show any calculations you make to support your journal entries.
Part III: Background
On January 15, KH sold a mixer it purchased from MU for $80 cash and delivered it to a customer. As part of this purchase, KH issued a coupon to the customer for 8% off the $25 selling price for MU's new titanium replacement mixer blades. It is valid for 90 days. KH has not previously sold replacement mixer blades. KH's management has considered the likelihood of use and the value of the coupon and estimated a standalone selling price for these coupons at $1.
Requirements: • Record all accounting entries for KH for January 15 for this transaction based on the current revenue recognition guidance in ASC 605. Include references to the guidance to support your proposed accounting. Show any calculations you make to support your journal entries.
• Prepare a detailed explanation of each of the five steps of revenue recognition. Record all accounting entries for this transaction for KH for January 15 based on the new guidance on revenue recognition in ASC 606. Include references to the guidance to support your proposed accounting. Show any calculations you make to support your journal entries.