Question: Canadian Equipment Ltd makes electronic equipment used in mining exploration

Canadian Equipment Ltd. makes electronic equipment used in mining exploration. The existing owners are in the process of finalizing the sale of the company to some international buyers. The selling price of the company will be based, in part, on Canadian Equipment's income before taxes for the year ended December 31, 2017. The financial statements are being finalized but there is an outstanding sale transaction and the buyer and seller can't agree on the appropriate accounting. In the last week of December 2017, Canadian Equipment shipped a $4 million order to a new customer. The items sold come with a six month warranty. This is the standard warranty offered to all customers. The product is a standard item with only minor modifications to meet the needs of the customer. The order was scheduled to be shipped in early January but because of an opening in the production schedule Canadian Equipment was able to complete the order several weeks early. Once the order was completed, it was shipped to the customer. The customer agreed to accept early delivery before Canadian Equipment shipped the order. The cost of the order was $2.5 million. The goods were received by the customer on December 31, 2017. Canadian Equipment recognized revenue when the good were delivered, as is its normal policy.

Prepare a report to the parties analyzing how the revenue should be recognized on the sale. The buyer and seller have agreed to accept your recommendation on the appropriate treatment. Provide full support for your recommendation.

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  • CreatedFebruary 26, 2015
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