You are the Financial Accountant of Incara plc, a company that operates from a number of retail outlets throughout Ireland, selling vehicle entertainment and navigation systems. Incara plc prepares its financial statements to the 31 December each year. Incara plc received and accepted an order for car CD changers from a regular customer, CCE Limited, on 21 December 2007 for an agreed price of €50,000. However, due to the Christmas holidays, the goods were not despatched until 4 January 2008. CCE Limited received the goods on the same day, and paid for them on 13 January 2008. The goods are *

included in Incara plc’s inventory at 31 December 2007 at their cost price of €40,000.

During the year ended 31 December 2007, Incara plc began selling a particular model of satellite navigation system with a three-year warranty at no extra cost to the customer.

Incara plc sells the navigation systems for €500 and, during the year ended 31 December 2007, 200 of these navigation systems were sold and included in revenue for the year ended 31 December 2007 at €500 each. One of Incara plc’s competitors sells an identical navigation system without a warranty for €475, while an unrelated insurer offers an equivalent warranty for €75. The experience of other retailers suggests that the navigation systems have an equal probability of breaking down in each of the three years covered by the warranty.

Requirement Prepare a memorandum addressed to the board of directors of Incara ple which explains:

(a) how the order from CCE Limited and the income from the sale of the navigation systems, together with the related warranties, have been accounted for in the financial statements of Incara plc for the year ended 31 December 2007; and

(b) the principles underlying revenue recognition and their application to different industries.