On August 1, 2021, Pennant Uniforms Ltd. entered into a contract with Branch Health Clinic to provide
Question:
On August 1, 2021, Pennant Uniforms Ltd. entered into a contract with Branch Health Clinic to provide 300 medical uniforms, terms 2/20, n/45, FOB shipping point. The uniforms sell for $80 each and cost Pennant Uniforms $35 each. Pennant’s stated return policy is 20 days from the date of sale. The uniforms were shipped on September 15, 2021. Pennant’s management uses the contract-based approach for revenue recognition and the expected value method to estimate variable consideration. The following information has been provided by Pennant’s management:
1. Returns are 5% of sales 70% of the time and 15% of sales 30% of the time.
2. Branch Health Clinic pays within the discount period 70% of the time.
Instructions
a. Identify the variable consideration in the contract.
b. Calculate the transaction price for this contract. Round all amounts to the nearest dollar. Calculate the expected value of the returns first and the expected value of the sales discounts second.
Step by Step Answer:
a The variable consideration in the contract is the right of return and sales discounts offered Estimated returns and cash discounts both change the amount of consideration that Pennant expects to receive b Expected value right of return Total selling price 300 x 80 24000 Possible outcome Amount Probability Probabilityweighted amount 1 22800 24000 x 95 70 15960 2 20400 24000 x 85 30 6120 Expected value 22080 Expected value of sales discount ...View the full answer
Accounting Principles Volume 2
ISBN: 978-1119502555
8th Canadian Edition
Authors: Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel, Barbara Trenholm, Valerie Warren, Lori Novak
