Emerging from the shutdown, many of KTR’s customers had long work backlogs and were ordering custom-built products that they were not able to store. So many sales in 2020 were done on a bill-and-hold basis at customers’ requests. KTR made items to the customer’s specification, sent invoices upon completion, and held the goods in its warehouse until the customer was ready to take possession of them. $160,000 of such sales were made in 2020, all credited to sales revenue (with $30,000 still owed on the related outstanding invoices at December 31, 2020). Bill-and-hold arrangements were only made with KTR’s regular customers, and collectability of the remaining $30,000 is reasonably assured.

The inventory related to bill-and-hold sales had a cost of $100,000, all debited to cost of goods sold. Of that $100,000, $40,000 (at cost, invoice price $55,000) was still physically in KTR’s possession, though not in the inventory account, at December 31, 2020, with the remaining $60,000 having been delivered to customers. The inventory still in KTR’s possession was in its shipping department and packaged for shipment. Mailing labels are not generated until the items are shipped, so none of the products in KTR’s possession under bill-and-hold arrangements had the customers names on them. The shipping manager notes, however, that since all of the bill-and-hold goods are special orders, they are not available for general purchase through the company’s web site, and no one else could buy them even if they wanted to.

KTR has never done this kind of transaction prior to 2020, and your manager is concerned about whether GAAP has been followed correctly. She has asked you the following.

• Its it appropriate to recognize these transactions as revenues, or should some or all of these sales not be recorded as such. Should some or all of the inventory be put back into the inventory account?
• Prepare any journal entry necessary to correct the treatment of bill-and-hold sales. If no journal entry is necessary, state why it is not.

  INSTRUCTIONS

• Go to http://aaahq.org/Research/FASB-GARS, and click the box near the top for “FASB User Login”. This will take you to the GAAP Codification database where all GAAP original pronouncements are. Navigation may be done from the tree menu on the left (you might go through “Assets” to get to “330 – Inventory”, for example) or the search box at the top. GAAP guidance is required to answer the questions in this case.
• Prepare a memo to your manager answering the questions above. You must cite specific sections of the GAAP codification database in your answer by number. For instance, the section for Inventory – Overall – Scope and Scope exceptions is 330-10-15 and quote the guidance where necessary and appropriate.
• NOTES
• Brevity is valued in business communication. You should clearly articulate your conclusions, but you should not write more than is necessary to deliver and support them. If you write more than four double-spaced pages, you’re probably overdoing it.
• Answer the three cases independently. That is, don’t worry about misapplied overhead in your answer to the bill-and-hold question.
• You may work in a group of up to four students on this assignment. If you do, make sure all students who collaborated on the submission are named on the submission, but submit only one copy.