Question 2

Part A: [5 marks]

Organic Growth Company is presently selling new products. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. Organic Growth allows these customers to return these products within four months for full cash refunds. On January 1, 2019, Organic Growth sells products to these customers for $1,500,000 cash. The cost of sold products is $750,000 for Organic Growth. In the meanwhile, Organic Growth estimates that the probability of returns is 20% and it uses the expected value method (probability-weighted amount) to predict the revenues.

On April 30, 2019 (the last day valid for product returns), one customer actually returns the products with a selling price of $100,000. There are no product returns in any other days during this period. Other customers also confirm that they will not return products.

Required: (a) Prepare journal entries on January 1, 2019. [3 marks]

(b) Prepare journal entries on April 30, 2019. [2 marks]

Part B: [5 marks]

On August 1, 2019, Brady Ltd. entered into a contract to sell equipment to Flush Corporation for $80,000 (cash sale on August 1). At the same time, both companies agreed that Brady Ltd should repurchase the same equipment from Flush Corporation on June 30, 2020, for a price of $85,500 (cash repurchase).

Required:

Prepare journal entries for Flush Corp. on three dates: August 1, 2019, December 31, 2019, and June 30, 2020. [5 marks]

Part C: [4 marks]

Park-n-Shop is promoting a deal. For a single purchase of $500, the customer can choose to get a $50 voucher for next purchase as long as the customer posts an advertisement on the Facebook. Under this deal, the customer needs to pay $520 for the current purchase (i.e., if the customer takes the deal, she or he pays $20 more). The fair value of Facebook advertisement is $20 for each post.

Required:

Prepare journal entries for Park-n-Shop when a customer purchased $500 goods and chose to take this deal. You dont need to record the inventory-related journal entry.