Kim Le is the senior accountant on the Brothers Manufacturing Ltd. (BML) audit for the year ended December 31, 2020. This is Kims second year on the engagement. BML has traditionally produced custom furniture for private clients. During the year, it signed an agreement with The Block, a well-established nationwide furniture retail chain, to produce an entire line of accent furniture. This is a significant contract for BML and it is the first time it has signed a multi-year contract. During the year, BML signed another contract with a Howard Corp. for a large delivery of office furniture. Due to its large size, the contract has terms that are different than normal. The audit partner has asked Kim Le to review how BML has recorded the revenue related to the contracts at December 31, 2020, and to propose any adjusting entries if necessary. BML follows Accounting Standards for Private Enterprises (ASPE). The following information was provided: Appendix I, details related to The Block contract Appendix II, details related to the Howard Corp. contract Review the details of the contract with The Block in Appendix I and determine if BML recorded the revenue amount and contract costs correctly. If not, prepare the required adjusting journal entry or entries. Q1 how to adjust revenue and cost of goods sold related to the November order? Q2- how to adjust revenue and cost of goods sold related to the December order? Q3- How to adjust for the contract costs as at December 31, 2020?
Appendix I: Details Related to The Block Contract Details related to The Block contract On September 30, 2020, BML and The Block signed a two-year sales agreement that commenced on November 1, 2020. BML agreed to sell to The Block $15,000 of furniture per month over the term of the contract. The cost to manufacture the furniture each month is $11,000. Shipping terms are FOB shipping point. Payment is due 30 days from shipment The November order shipped on November 30 and the revenue and cost of goods sold was recorded on that date. The December order shipped on January 2, 2021, because of delays related to holiday scheduling. Revenue and cost of goods sold related to the order was recorded on December 31, 2020. BML incurred costs in obtaining and negotiating this contract in September. Costs incurred consisted of commission fees paid of $3,000, legal fees to prepare the contract of $9,240, and an allocation of administrative time to meet with the customer of $6,000. These costs were initially all expensed under their respective accounts commissions, legal fees, and administrative salaries - during September when incurred. However, BML's policy is to capitalize and amortize contract costs evenly over the term of the contract, rather than immediately expense. BML's practice is to ensure that all related contract costs are recovered as part of the profit related to the contract. Appendix II: Details Related to the Howard Corp. Contract Details related to the Howard Corp. contract BML signed a contract for custom-made office furniture totalling $120,000 with Howard Corp. The contract specifies that the furniture would be shipped on January 2, 2020, and the furniture was shipped on this date. The amount owing of $120,000 will be paid as follows: $20,000 on January 2, 2020, $50,000 due on December 31, 2020, and $50,000 due on December 31, 2021. During 2020, the company recorded the receipts of the cash of $20,000 on January 1 and $50,000 on December 31 and recognized sales revenue of $120,000. On December 31, a note receivable of $50,000 is still outstanding. Note from BML's controller: Normally, this furniture would have been sold for $110.400 if the invoice were paid within 30 days of shipment. According to BML's accounting policies, the effective interest method is used for amortization of interest revenue for a long- term note. Appendix I: Details Related to The Block Contract Details related to The Block contract On September 30, 2020, BML and The Block signed a two-year sales agreement that commenced on November 1, 2020. BML agreed to sell to The Block $15,000 of furniture per month over the term of the contract. The cost to manufacture the furniture each month is $11,000. Shipping terms are FOB shipping point. Payment is due 30 days from shipment The November order shipped on November 30 and the revenue and cost of goods sold was recorded on that date. The December order shipped on January 2, 2021, because of delays related to holiday scheduling. Revenue and cost of goods sold related to the order was recorded on December 31, 2020. BML incurred costs in obtaining and negotiating this contract in September. Costs incurred consisted of commission fees paid of $3,000, legal fees to prepare the contract of $9,240, and an allocation of administrative time to meet with the customer of $6,000. These costs were initially all expensed under their respective accounts commissions, legal fees, and administrative salaries - during September when incurred. However, BML's policy is to capitalize and amortize contract costs evenly over the term of the contract, rather than immediately expense. BML's practice is to ensure that all related contract costs are recovered as part of the profit related to the contract. Appendix II: Details Related to the Howard Corp. Contract Details related to the Howard Corp. contract BML signed a contract for custom-made office furniture totalling $120,000 with Howard Corp. The contract specifies that the furniture would be shipped on January 2, 2020, and the furniture was shipped on this date. The amount owing of $120,000 will be paid as follows: $20,000 on January 2, 2020, $50,000 due on December 31, 2020, and $50,000 due on December 31, 2021. During 2020, the company recorded the receipts of the cash of $20,000 on January 1 and $50,000 on December 31 and recognized sales revenue of $120,000. On December 31, a note receivable of $50,000 is still outstanding. Note from BML's controller: Normally, this furniture would have been sold for $110.400 if the invoice were paid within 30 days of shipment. According to BML's accounting policies, the effective interest method is used for amortization of interest revenue for a long- term
