The following transactions took place in October 2017 for Slim's Organic Food Store. Slim's uses the earnings approach to revenue recognition and a perpetual inventory system. Slim's estimates returns at 0.5% of sales.
Oct. 4 Purchased a building for $175,000 by borrowing $100,000 from the bank and paying the rest in cash.
10 The owner of Slim's recently announced she was engaged to be married.
15 Sold goods for cash that cost $1,500 for $3,300.
18 Ordered new commercial refrigeration unit that will be delivered in January 2018.
20 Sold $2,000 of goods to TotWorld DayCare, n/30. The goods cost Slim's $1,250. There is no uncertainty about TotWorld's ability to pay the amount owing.
24 Paid employee wages in the amount of $1,500.
31 Received a $300 invoice for Internet and telephone service for the month of October.
31 Recorded depreciation on store equipment of $1,000.
Instructions
For each of the above transactions, indicate what element(s) will be recognized (if any). If no element should be recognized, explain why.
TAKING IT FURTHER
Accounting estimates are a critical part of accrual accounting. Discuss the process that an accountant should go through when making estimates. What would be the impact on the financial statements if the estimate made for returns is erroneous?