Question: General Motors GM disclosed in a Form 8 K filed in

General Motors (GM) disclosed in a Form 8-K filed in November Year 2, that it would restate its financial statements to correct the accounting for credits and other lump-sum payments from suppliers. Typically, suppliers offer an up-front payment in exchange for the customer’s promise to purchase certain quantities of merchandise over time. Per GAAP, such “rebates” cannot be recognized until after the promised purchases occur.

As GM noted,
GM erroneously recorded as a reduction to cost of sales certain payments and credits received from suppliers prior to completion of the earnings process. GM concluded that the payments and credits received were associated with agreements for the award of future services or products or other rights and privileges and should be recognized when subsequently earned. Assume that GM signed a procurement contract on January 2, Year 1, that obligated it to purchase 1 million tires each year for the next three years from one of its suppliers. As part of this agreement, GM received a cash payment of $75 million on January 5, Year 1.

1. Given GM’s past accounting practices for such rebates, what journal entry did the company make when it received the payment?
2. Had GM followed GAAP, what would the appropriate journal entry have been? Where would the account credited be shown on GM’s financial statements?
3. Assume that GM made the entry you suggested in requirement 2. What adjusting entry, if any, would have been required at December 31, Year 1? (Assume that GM reports on a calendar year basis and makes annual adjusting entries.)
4. Assume that GM “discovered” the error in its approach to recording supplier rebates on November 1, Year 2. What entry would be necessary to restate GM’s Year 1 balance sheet? (Ignore income tax effects.)
5. What impact did GM’s past accounting practices related to supplier credits and rebates have on reported net income in the year in which the rebate was received and in subsequent years?

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  • CreatedSeptember 10, 2014
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