Manchester Company manufactures and sells robot-type toys for children. Under one type of agreement with the dealers, Manchester is to receive payment upon shipment to the dealers. Under another type of agreement, Manchester receives payments only after the dealer makes the sale. Under this latter agreement, toys may be returned by the dealer. Manchester€™s president desires to know how the income statement would differ under these two methods over a 2-year period.
The following information is made available for making the computations:
Sales price per unit:
If paid after shipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7
If paid after sale, with right of return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8
Cost to produce per unit (assume fixed quantity of toys is produced) . . . . . . . . . . . . . $4
Expected bad debt percentage of sales if revenue recognized at time of shipment . . . 4%
Expected bad debt percentage of sales if revenue recognized at time of sale . . . . . . . 1%
Selling expenses€”2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,000
Selling expenses€”2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,000
General and administrative expenses€”2011 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . $16,000

Instructions:
1. Prepare comparative income statements for 2011 and 2012 for each of the two types of dealer agreements assuming the company began operations in 2011.
2. Discuss the implications of the revenue recognition method used for each of the dealeragreements.

Transcribed Image Text:

Quantity Shipped and Sold 2012 2011 Unlts shipped to dealers Units sold by dealers 38,000 28,000 32,000 18,000