Moto-Lite Company is an original equipment manufacturer of high-quality aircraft engines that it traditionally has sold directly to aero clubs building their own aircraft. The engine’s selling price depends on its size and horsepower; Moto-Lite’s average gross profit per engine is 35%.
To expand its sales, Moto-Lite entered into an agreement with Macco Corporation, a British manufacturer of light aircraft, to be the sole supplier of its 80 horsepower, 2 stroke engines. Under the terms of the agreement, Moto-Lite will stock a minimum of 10 engines at Macco’s production facility to service aircraft production requirements. Each engine has a firm selling price of $6,000.
Title to the engines does not pass until Macco uses the engine in its production process. During its quarter ending October 31, Moto-Lite shipped and billed 19 engines (DR Accounts receivable, CR Sales) to Macco Corporation. As of that date, Macco had used 9 engines in its production process. All but three of the engines used had been paid for prior to October 31. The remaining 10 engines will be used in November.

1. What type of agreement does this appear to be? Was Moto-Lite correct to record all 19 motors shipped as sales in the quarter ending October 31?
2. How should the transaction be accounted for and by how much, if at all, were Moto-Lite’s sales, receivables, and gross profit overstated at October 31?

  • CreatedSeptember 10, 2014
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