Kitchen Aid (KA) manufactures cordless mixers for residential use. KA sells to retailers (such as William Sonoma, Sur La Table, etc.) who sell the mixers to individual consumers. One of KA’s retail customers is Jones Kitchenware (JK). On January 1, KA sells to and receives payment from JK for 100 cordless mixers with a one-year warranty for $50 each. The mixers are delivered by KA to JK upon receipt of payment and the warranty is initiated at that time. This warranty provides for a replacement of the mixer if the mixer fails to function. KA also provides the standalone selling price of its mixers with no warranty at $40 per unit. The cost to manufacture each mixer is $32.

KA also provides its retail customers with sales incentives in the form of volume discounts on purchases of mixers with warranties paid at the end of an annual period. The agreement between KA and JK provides for the following volume discounts. Additionally, the probability of purchases for each volume level as estimated by KA is provided based on historical experience and forecasted sales.

Number of mixers purchased	Discount	Probability
Less than 1,000	0.00%	35.00%
1,000 through 1,999	3.75%	40.00%
2,000 or more	10.00%	25.00%

The discounts are retroactive, meaning if JK purchases a total of 2,000 mixers during the year, a discount of 10% will be applied to all 2,000 mixers at year-end.

Requirements

Prepare a memo addressed to KA’s CFO discussing how KA should recognize revenue related to the above sale. Discuss each of the 5 steps of revenue recognition. Specifically, is there a valid contract? How many performance obligations are there? How does KA determine the transaction price? If necessary, how do we allocate the transaction price? Lastly, when and how much does the seller recognize revenue for one or multiple performance obligations? Please including an appendix with all necessary journal entries for KA (seller) in the month of January. Provide calculations to support your work if necessary.

Answer rating: 100% (QA)

1 Prepare a memo addressed to KAs CFO discussing how KA should recognize revenue related to the abov... View the full answer