Question

On December 11, we received an order from long-time customer Barbor Furniture Ltd. (Barbor) for 14 sofas, at a total price of $22,100. Barbor provided a deposit of $9,000, which I recorded as revenue when it was received on December 13. The order was completed on December 28, but because our delivery trucks were out of service, it wasn't delivered to Barbor until January 2. Our yard was broken into on December 29 and a number of items, including all of the delivery trucks, were vandalized and need repairs.

Answer 1

The recording of the deposit as revenue before delivery is incorrect as per the revenue recognition principle, which dictates that revenue should be recognized when earned and delivery is completed. The deposit should be recognized as revenue only after the sofas are delivered to the customer.

Step-by-step explanation:

The recording of a deposit as revenue upon receipt, before delivery of the goods, is related to the revenue recognition principle in accounting. According to this principle, revenue should only be recognized when it is earned and realizable. In this scenario, the order for sofas was completed on December 28, but the revenue from the deposit should not have been recorded on December 13 when it was received because the delivery had not yet occurred.

The revenue should be recorded when the sofas are delivered and the earnings process is complete. Moreover, in the context of the vandalism that happened, it suggests an impact on the company's assets and subsequent expenses for repair that should be recorded in the appropriate accounting period.