Question

Gil is a Baxley Co. salesman desperate to make quota by the end of year 3. On the afternoon of December 31, year 3, he convinces a longtime customer with excellent credit to sign a contract to accept delivery of Baxley Co.’s Widgetron Deluxe. Gil promises the customer a deep discount off the list price that they can ‘hash out later’ if the customer is 100% happy with the product. Gil does not tell the customer that the company’s policy in such cases is to offer the maximum discount of 30%. The customer states he will have to consult an astrologer and a groundhog to determine if he is happy with the product. Gil oversees the delivery that evening of the Widgetron Deluxe. Should the revenue from this sale be recognized in year 3? Why or why not?

Answer 1

Under generally accepted accounting principles, revenue should be recognized when it is realized or realizable, and earned. In this scenario, uncertainties regarding the final price and customer satisfaction criteria suggest that the revenue from Gil's sale of the Widgetron Deluxe may not be recognized in year 3.

Step-by-step explanation:

The recognition of revenue for accounting purposes depends on specific criteria being met. The critical criteria, outlined by the generally accepted accounting principles (GAAP), state that revenue should be recognized when it is realized or realizable, and when it is earned. In the scenario with Gil and Baxley Co., Gil's sale of the Widgetron Deluxe could potentially be recognized in year 3, but there are contingencies to consider.

The fact that the customer has signed a contract and the product has been delivered are points in favor of recognizing the revenue. However, the mention of a discount to be 'hashed out later' introduces an element of uncertainty to the sale. Moreover, the company's policy of a maximum 30% discount is not communicated to the customer which could lead to a potential dispute. This uncertainty suggests the revenue should not be recognized until the price is firmly established.

Additionally, the customer's quirky conditions for determining their satisfaction, consulting an astrologer and a groundhog, further complicate the realization of the sale, signaling that the revenue may not be earned yet in the eyes of GAAP. Considering these factors, it is arguable that Gil's transaction may not meet the requirements for revenue recognition in year 3.

Answer 2

No, the revenue should not be recognized in year 3.

Step-by-step explanation:

In this case, the client has a right to return the Widgetron Deluxe (the product sold). Apparently the client isn't even convinced that he wants to buy it and consulting an astrologer and a groundhog on whether he should keep it or not is not something normal. Gil didn't even tell the customer the price of the Widgetron Deluxe which makes things even more messy.

Revenue from this specific sale should only be recognized after the right to return expires or both the groundhog and the astrologer are happy with it.