Ice Cream Trucks Unlimited (ICTU) started off from GregPearce's summer job driving ice cream bikes. He enjoyedthe experience so much, that he stuck with it after he got hisMBA. Greg is the sole owner, and enjoys the money he is ableto withdraw from the company's excess cash flow. Thecompany recently started a new business line, selling and servicingice cream trucks. The company offers two payment plans fortruck purchases, and also has a "Truck Plus a Buck"plan that adds $1000 to the cost of the truck, but includes allservicing and maintenance for a 2 year period. The trucks havea list price of $65,000, but the company expects to discount offlist on a regular basis. Customers, who may or may not havepurchased a truck from ICTU, can also buy truck servicing on anhourly basis at $100 per hour of service required.
The two payment plans are as follows:
Option 1: $10,000 down payment upon order receipt, $50,000on delivery (normally within 30 days of order)
Option 2: $10,000 down payment upon order receipt, twoannual payments of $27,500, starting 1 year after delivery
For the Truck Plus a Buck (TPB) plan, the $1,000 is added to thedown payment.
The company's controller, whose compensation will be basedon gross profits, has determined that revenue should be recorded upon order receipt. Under Option 1, he would record $60,000 ofrevenue (or $61,000 under the TPB plan), and under Option 2,$65,000 (or $66,000 under the TPB). The company purchases each btruck for $35,000 from the supplier, and spends another $5,000 pertruck outfitting them for ice cream sales. In order to stock asmall inventory of trucks to meet order demand, the company has negotiated a line of credit with a major bank, which requires the company to provide audited financial statements eachyear.
Required:
You have been asked by the company's owner toprovide a report analysing the options for accounting for BBean`snew ice cream sale and service transactions and to provide recommendations.
Further information:
It is a month later, and ICTU has made its first sale of a truckunder payment option2. The customer did not purchase the TPBplan, as their own staff are mechanically inclined. Greg hasasked you to discuss how they should account for this sale underIFRS, since he anticipates the company will be using a parallel accounting system for a year before they convert in 2011.