Section 1 Background

Mixer Up (MU) manufactures cordless mixers for use in the kitchens of consumers. MU sells to retailers, which sell the mixers to the ultimate consumer. One of MU's retail customers is Kitchen Hardware (KH). On January 1, MU sells to and receives payment from KH for 100 cordless mixers with a one-year warranty for $50 each.The mixers are delivered by MU to KH upon receipt of payment and the warranty is initiated at that time as well by MU.This warranty provides for a replacement of the mixer if the mixer fails to work properly within one year of the date of purchase.MU also sells its mixers with no warranty for $40 per unit.The cost to manufacture each mixer is $32.

MU also provides its retail customers with sales incentives in the form of volume discounts on purchases of mixers with warranties paid at the end of an annual period. The agreement between MU and KH provides for the following volume discounts.Additionally, the probability of purchases for each volume level as estimated by MU is provided based on historical experience and forecasted sales.

Number of mixers purchased

Discount

Probability

Less than 1,000

0.00%

35.00%

1,000 through 1,999

3.75%

40.00%

2,000 or more

10.00%

25.00%

The discounts are retroactive.If 2,000 mixers are purchased during the year, a discount of 10% will be applied to all 2,000 mixers..

Section 1: Part 2 Requirement

You are asked to advise MU on how revenue related to the KH transaction should be recognized during January, taking into consideration the volume discounts and warranties, if necessary. Suggest journal entries and disclosures, if required. Your memo should be based on the new, revised revenue recognition standard. You should specifically address each of the 5 steps.