Required:

Please read these steps carefully and follow this format for your responses.

1. In one or two sentences describe the accounting issue, and explain how it has been accounted for according to the case facts (or state that it hasnt been accounted for yet).

2. Cite ALL of the relevant ASPE guidance that applies to the particular accounting issue. (from CPA Accounting Handbook, Part II, section 3400)

3. Apply case facts to the ASPE guidance. Simply inserting guidance from the handbook into your solution without applying case facts will result in very few (or no) marks being awarded.

4. Conclude on the accounting issue based on your analysis (in #2 and #3 above). Sometimes you may only be able to tentatively conclude. State if you need more information and explain what that information is.

Memo:

DARE has recently entered into an exciting and lucrative sales arrangement with one of its largest customers, Massive Retailer Inc. (MRI). MRI orders tens of millions of dollars of products from DARE every year.

The new arrangement involves a recently invented Build Your Own Robot kit that allows customers to build their own miniature remote controlled robot. The kit comes with all of the parts and tools necessary along with detailed instructions. DARE also created an extensive series of online videos customers can watch to help them build and use their robot to its full potential. The robot is designed for teenagers and young adults ages 14 21 that are interested in the STEM* fields

The robot has working legs, hands, and feet, and can even walk up and down stairs. It has Wi-Fi capability, can stream music from the internet, and obey simple voice activated commands. A retail sales price of $2,999 has been set by DARE. Retailers are only allowed to sell the kit to their customers at this price.

On October 15, 2019, DARE shipped 1,000 kits to MRI (FOB shipping). MRI paid DARE for the shipment upfront. The cost of one kit to DARE is $500 and they were able to sell each kit to MRI for $1,000. DARE is very excited about generating a 100% margin on this product.

MRI is nervous about the high selling price and therefore didnt want to buy any of the kits from DARE without some protection in place. To protect MRI from potentially low demand, DARE has given them a 6-month period of time during which they can return to DARE, for a full refund, any products they dont sell. This is the first time DARE has entered into this type of arrangement. Penny says that even though no formal market research was done, Uma and Kwame are optimistic that all 1,000 units will be sold by MRI because the new robot kit is awesome. They are hoping that the Build Your Own Robot Kit will be the hottest toy this Christmas season. They are convinced that the customers will snap them up from MRI and will be demanding more after the first 1,000 are sold.

Penny has recorded the following entries under the perpetual method of inventory:

Dr Cash 1,000,000 Cr Sales 1,000,000

Dr Cost of Goods Sold 500,000

Cr Inventory 500,000