Question
Ocean Pacific Limited sells split-type air conditioners through an internet ordering system. The company has undertaken the responsibility for installing air conditioners in customers' premises.
Ocean Pacific Limited sells split-type air conditioners through an internet ordering system. The company has undertaken the responsibility for installing air conditioners in customers' premises. Customers pay in advance for the air conditioners when placing their orders. The average length of time between the delivery and final installation is 5 days. 80% of the sales invoice amount relates to the air conditioner and 20% to the installation service. Ocean Pacific's existing accounting policy is to recognize sales revenue only when the air conditioners had been successfully installed.
The new Financial Controller of Ocean Pacific is proposing to change the accounting policy to recognize sales revenue when customers order and pay for the air conditioners.
Required:
Evaluate the impact of BOTH the existing and the proposed new accounting policy for recognizing the sales revenue as mentioned above, and advise if they are CORRECT or not to comply with the relevant accounting principles and concepts for revenue recognition.
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