Oshawa Motors Ltd., a public company, operates car dealerships that has two types of operations - car
Question:
Oshawa Motors Ltd., a public company, operates car dealerships that has two types of operations - car sales and service. It has a December 31st yearend. The company provides incentives to its sales team to sell maintenance packages along with the sale of cars. Consider the following offer posted on one of the car windows:
| PRICE |
Car | $45,000 |
Basic Service Package (2 years) | 1,500 |
Premium Service Package (4 years) | 4,500 |
Complete car package | $51,000 |
Special offer if all items are purchased together | $47,500 |
You save | $3,500 |
The basic service package covers routine items for the first two years. The premium package covers items not covered by the basic package for a period of four years from the purchase date.
As is typical in auto industry, the salesperson has considerable latitude in adjusting the price to “close the deal”. On December 29, 2019, a customer signed an agreement to buy the complete car package outlined above for $46,000 and paid a $3,000 non-refundable deposit. The car was delivered to the customer on January 1, 2020.
The president of Oshawa intends to recognize the entire sales amount of $46,000 in December 31, 2019 financial statements. Assume that the three prices (for car, basic service and premium service) reliably reflect the stand-alone selling price of these items.
Required:
You are the accountant for Oshawa. Do you agree with the president’s intended treatment of the December 29th transaction? Provide your reasons – make reference to the revenue recognition criteria we discussed in class. If you disagree, determine the amount of revenue you believe Oshawa should recognize in 2019, 2020 and 2021. All supporting calculations must be provided.
Expert Answer:
The major condition of revenue recognition principle to be fulfilled in order to recognize revenue they a The delivery of the products or services has ... View the full answer
