Kimberly\'s Auction House (KAH) facilitates estate sales. It earns 20% commissio
ID: 2543625 • Letter: K
Question
Kimberly's Auction House (KAH) facilitates estate sales. It earns 20% commission on all completed sales, which is deducted from the "hammer price" (i.e. price agreed to by the winning bidder). Almost two years ago, Leonard Nimoy (a.k.a. Spock) passed away. On 12/31/15, Estate of Nimoy signs a fully binding consignment agreement and delivers Star Trek memorabilia to KAH's showroom in Beverly Hills. The wholesale value of the memorabilia is $1 million, but Kimberly, a Star Trek expert, expects to sell it for $2 million in a well publicized auction KAH should record s contract? of inventory on its 12/31/15 balance sheet related to Nimoy KAH should recognize S_ot Nimoy contract? of revenue on its 2015 income statement related to signing Auction happens on 5/1/16 and total for all winning bids is S2 milion. in order to bid, Trekkies must sign a binding contract saying 1) winning bidder will pay hammer price within 45 days and 2) buyer is obliged to take possession of the item and 3) buyer waives her right of return. Trekkies often regret thedeci tonto buy expensivememorabilia. Kimberly estimates 10% ofthe totatsae price will eventually be uncollectable as bad debt (i.e. consider an allowance for doubtful A/R) You're CPA for Nimoy Estate. Please prepare journal entries on 5/1/16 in accordance with GAAP: KAH is responsible for collecting payment in order to complete a sale. KAH offers buyers a discount of 1% of the hammer price if he or she pays within 10 days. This discount comes exclusively out of KAH's commission. KAH uses the net method to account for this discount. On 5/11/16, KAH has collected $1,188,000 in cash. You're CPA for KAH. Please prepare GAAP journal entries for period of S/1 to 5/11/16: ClExplanation / Answer
The inventory should be recorded on Wholesale rate on the balance sheet. So, the inventory would have a corresponding value of $1 million.
Revenue should only be recognized when it is actually made. Signing the contract doesn’t result in any sales and it is only inventory for KAH. So, there should be no revenue realization (i.e. $0) corresponding to the memorabilia.
2) Journal entries to be made in Nimoy Estate’s books:
Date
Account
Debit
Credit
05 May 2016
Accounts Receivable
$2,000,000
Revenue
$2,000,000
05 May 2016
Allowance for Doubtful Debts
$200,000
Accounts Receivable
$200,000
Journal entries to be made in KAH’s books:
Commission Revenue = $2,000,000 x 20% = $400,000
On the net term, 1% discount is given. This means $1,188,000 is 99% of total revenue collected.
Revenue collected = ($1,188,000/0.99) x 1 = $1,200,000
Sales discount = $1,200,000 x 1% = $12,000
Date
Account
Debit
Credit
05 May 2016
Account Receivable-Auction Revenue
$400,000
Commission Revenue
$400,000
05 May 2016
Accounts Payable
$2,000,000
Auction Revenue
$2,000,000
11 May 2016
Cash
$1,188,000
Sales Discount
$12,000
Account Receivable-Auction Revenue
$1,200,000
11 May 2016
Sales Discount
$12,000
Commission Revenue
$12,000
Date
Account
Debit
Credit
05 May 2016
Accounts Receivable
$2,000,000
Revenue
$2,000,000
05 May 2016
Allowance for Doubtful Debts
$200,000
Accounts Receivable
$200,000
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