Problem #1: Basic Revenue Recognition (50 points)

Presented below are four scenarios that require you to apply the revenue recognition principle. The first scenario also requires you to apply the matching principle.

Scenario #1: Shipment of Goods (20 points)

• On November 14, 2020, Gaga Wireless Devices received an order to sell goods to Knowles Communications for $425,000 to be delivered by Lauper Transportation under terms of FOB Shipping Point. Gaga Wireless Devices received cash of $85,000 from Knowles Communications as a 20% refundable deposit.

• On November 15, 2020, Gaga Wireless Devices received the goods from its manufacturing subsidiary, Ciccione Electronics, at a cost of $292,500. Gaga Wireless Devices paid cash of $62,500 to Ciccione Electronics to cover the cost of components that must be purchased for the production of the goods.

• On November 25, 2020, Gaga Wireless Devices received the goods along with an invoice from Ciccione Electronics for the $292,500 price with the remaining balance of $230,000 due in 30 days.

• On November 27, 2020, Gaga Wireless Devices prepared the goods for shipment to Knowles Communications.

• On November 28, 2020, Gaga Wireless Devices loaded the goods on the Lauper Transportation truck and gave the driver an invoice Knowles Communications for the entire $425,000 selling price with the remaining unpaid balance of $340,000 due in 30 days.

• On December 4, 2020, Gaga Wireless Devices received notification from Lauper Transportation that the goods arrived at Knowles Communications earlier that day.

• On December 5, 2020, the appropriate party based on the shipping terms received an invoice Lauper Transportation for $2,500 for the freight charges for the shipment. The appropriate party immediately issued a check to Lauper for $2,500.

• On December 26, 2020, Gaga Wireless Devices sent a check for $230,000 to Ciccione Electronics to settle the outstanding balance for the purchase of the goods.

• On January 15, 2021, Gaga Wireless Devices received a check for $340,000 from Knowles Communications as payment in full of the outstanding balance due for the goods.

Required:

Analyze the facts described in the scenario to determine the proper treatment of transactions by Gaga Wireless Devices under accrual accounting. Write your answers to the questions in the spaces provided.

1) Determine the proper timing of the recognition of revenue amount(s). Enter the amount(s) of revenue recognized into the proper month(s). Identify the exact date(s) when revenue was recognized under GAAP. (2 points each line = 4 points)

Accrual Basis	November 2020	December 2020	January 2021
Revenue

Exact Date(s):

2) Determine the proper timing of the recognition of expense amount(s). Enter the amount(s) of expense recognized into the proper month(s). Identify the exact date(s) when expense was recognized under GAAP. (2 points each line = 4 points)

Accrual Basis	November 2020	December 2020	January 2021
Expense

Exact Date(s):

3) Determine the proper timing of cash received and cash paid by Gaga Wireless Devices. Enter the amounts in the proper month(s). (2 points each line = 4 points)

Cash Basis	November 2020	December 2020	January 2021
Cash Inflows

Cash Outflows

4) Assume the shipping terms were changed to FOB Destination.

Determine the proper timing of the recognition of revenue amount(s) and expense amount(s). Enter the amount(s) of revenue and expenses recognized into the applicable spaces provided. Identify the exact date(s) when revenue and expenses were recognized under GAAP.

(2 points per box = 8 points)

Revenue

Expenses

Exact Date(s):

Exact Date(s):