Question

Problem 5: Revenue Recognition (3 points) FlexMotors, Inc. manufactures a variety of electronic drills and grass cutters. Recently, it introduced a new line of handheld drills that generates much less noise and consumes much less energy, but carries a much higher price tag. The company is currently considering whether it should record $1.2 million of revenue upon shipment. Under the contract, FlexMotors is obligated to accept any products from the distributors if they are not sold within 6 months. The company is confident that the new model will sell, but is unable to accurately estimate returns, because it has never sold anything quite like it. Required: How much revenue should FlexMotors recognize upon shipment to distributors?

Answer 1

As per IFRS, revenue should be recognized

1.       when the risk and rewards of the ownership has been transferred by the seller to the buyer.

2.       The seller does not have any control over the goods sold.

3.       There is certainty regarding the collection of amount of sales.

4.       The amount of sales can be reliably measured.

In the present case, there is no certainty regarding the sale of the product from dealers location as the product is a new product in the market.

Further Flex motor is under an obligation to accept any unsold products from dealers.

Therefore revenue should not be recognised on shipment as the conditions mentioned above are not fulfilled.

Revenue should be recognised on actual sales to customers.