(Considering when to recognize revenue, LO 1, 2, 6, 7) Teslin Inc. (Teslin) is a medium-sized manufacturer...
Question:
(Considering when to recognize revenue, LO 1, 2, 6, 7) Teslin Inc. (Teslin) is a medium-sized manufacturer of plastic storage containers. Teslin is a private corpo- ration that is owned entirely by a single shareholder, Kim Chung. Ms. Chung is not involved in the day-to-day management of Teslin, but she does speak regularly with Teslin’s president, Mr. Krajden. Mr. Krajden is compensated with a salary plus a bonus based on Teslin’s net income.
On October 1, 2005 Teslin signed a $1,000,000 contract with the Government of Canada to design and manufacture storage containers for all the tax dollars they col- lect from Canadians. The storage containers must be delivered by April 1, 2007. The government will pay $250,000 on April 1, 2006, $250,000 on January 15, 2007, and the balance 30 days after all the containers have been delivered. Teslin plans to begin pro- duction of the containers in early 2006. Teslin plans to ship 10% of the contracted number of containers per month beginning in September 2006. The contract stipu- lates that Teslin pay a penalty of $20,000 per week if the containers are not completely delivered by April 1, 2007. Teslin had to borrow $300,000 from the bank to provide cash to finance the project. Teslin expects to earn $225,000 from this contract.
You have been hired by Mr. Krajden to provide advice to him on how to recognize revenue on the contract with the government. Teslin’s year end is December 31.
Required:
a. Who are the possible users of Teslin’s financial statements and what use do they have for the statements?
b. What objectives of financial reporting would you suggest that Mr. Krajden consider when preparing Teslin’s financial statements? Explain.
c. How would you advise Mr. Krajden to rank the objectives? Explain.
d. What possible critical events for recognizing the revenue on the container contract can you identify for Mr. Krajden? Explain.
e. When would you recommend that Teslin recognize the revenue on the contract?
Make sure that you consider the constraints, facts, and objectives when responding.
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