On October 2, 2021, Solar Supplies Ltd. entered into a contract to supply solar panels to Spade Enterprises, FOB shipping point, terms 2/20, n/30. The selling price of the solar panels is $65,000 and the panels cost Solar Supplies $40,000. Solar Supplies has a stated return policy that goods may be returned within 20 days. The panels were shipped on October 10, 2021. Solar Supplies’ management estimates returns using the expected value method and sales discounts are estimated using the most likely outcome. Based on past experience with this product, returns are 5% of sales 40% of the time, 15% of sales 30% of the time, and 20% of sales 30% of the time. Spade Enterprises will most likely pay within the discount period. Solar Supplies Ltd. uses the contract-based approach for revenue recognition.

Instructions

a. Describe the contract between Solar Supplies Ltd. and Spade Enterprises.

b. Identify the variable consideration in the contract.

c. Calculate the transaction price. (Round all amounts to the nearest dollar.)

d. Prepare journal entries to recognize revenue on the appropriate date. (Hint: The expected value method is also used to determine the amount of cost of goods sold and estimated inventory returns.)

Taking It Further

Assume Spade Enterprises does not return any of the panels and pays within the discount period. Will this affect the amount of revenue that Solar Supplies recognizes? Explain.