Question

In September 2017, the sole shareholder of Molanosa Ltd. (Molanosa) agreed to sell 100 percent of the shares of the company to Winona Ltd. The terms of the sale require Winona to pay the shareholder $1 million when the deal closes on February 15, 2018 plus two times net income for the year ended December 31, 2017.
Winona also agreed to pay an additional $100,000 if net income for 2017 exceeds $200,000. You are Winona's CFO and you have just received Molanosa's financial statements for 2017, which shows net income for the year of $207,900. Further investigation showed that in late December 2017, Molanosa made a $20,000 shipment of goods to a new customer. Molanosa had been in negotiations with the new customer for some time and the final agreement was an important step in its planned expansion into western Canada. The terms of the sale are unusual in that they allow the customer to return any and all of the goods shipped at any time up until March 1, 2018. The customer isn't required to pay for the goods until March 31, 2018.
Molanosa normally recognizes revenue when goods are delivered to the customer and normally provides 30 days to pay. Molanosa recognized the sale to the new customer in 2017.

Required:
Prepare a report to Winona's CFO analyzing Molanosa's sale to the new customer. Your report should include an evaluation of the appropriateness of Molanosa's accounting for the sale and an assessment of why it might have entered into this transaction and why it might have accounted for it this way.



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  • CreatedFebruary 26, 2015
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