On April 15, 2010, the ABC Company (ABC) enters into a contract with a customer

Question

On April 15, 2010, the ABC Company (ABC) enters into a contract with a customer to provide Product Z for $100,000. Delivery occurs on April 30, 2010. Payment terms, which are standard for ABC, are as follows: $50,000 due June 15, 2010, and $50,000 due December 15, 2010. ABC’s customer is in the start-up phase and has been in operation for six months. As of June 30, 2010, the customer has made no payments. ABC obtained the financial statements for its customer, which revealed losses for all periods and a cash balance of $10,000. The customer informed ABC that it was in the process of finalizing an agreement for some additional venture financing, which will be used to make future payments. ABC demonstrates that it has persuasive evidence of an arrangement, delivery has occurred and the selling price is fixed.

Should revenue be recognized on this transaction when delivery occurs on April 30, 2010, under US GAAP? Why or why not?

Should revenue be recognized on this transaction when delivery occurs on April 30, 2010, under IFRS? Why or why not?

Under both US GAAP and IFRS, what consideration should be given to establishing an allowance for doubtful accounts? Provide detailed accounting support for all your answers.

Explanation / Answer

1. Revenue should be recognized on this transaction when delivery occurs on April 30, 2010, under US GAAP because;

a) The entity has transferred to the buyer the significant risks and rewards of ownership of the goods

b) The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.

2. Revenue should be recognized on this transaction when delivery occurs on April 30, 2010, under IFRS because;

3.

Recoverability of some receivables may be doubtful although not definitely irrecoverable. Such receivables are known as doubtful debts. Prudence concept of accounting requires that an allowance be created to recognize the potential loss arising from the possibility of incurring bad debts.

The allowance for doubtful debts is created by forming a credit balance which is deducted from the total receivables balance in the statement of financial position. This works in the same way as accumulated depreciation is deducted from the fixed asset cost account. The allowance for doubtful debts reduces the receivable balance to the amount that the entity prudently estimates to recover in the future.

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