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Answer the following questions regarding the recognition of revenue. Use a complete sentence to explain the...

Answer the following questions regarding the recognition of revenue. Use a complete sentence to explain the amount of revenue.

eBay sells used products collected from different suppliers. Assume a customer purchases a used bicycle through eBay for $300. eBay agrees to pay the supplier $200 for the bicycle. The bicycle will be shipped to the customer by the original bicycle owner.

  1. Assume eBay takes control of the bicycle before the sale and pays $200 to the supplier. How much revenue would eBay recognize at the time of the sale to the customer? Why?
  2. Assume eBay bay never takes control of the used bicycle before the sale. Instead the bicycle is shipped directly to the customer by the original bicycle owner, and then eBay pays $200 to the supplier. How much revenue would eBay recognize at the time of the sale? Why?

3. Assume eBay promised to pay $200 to the supplier regardless of whether the bicycle is sold, but the bicycle will continue to be shipped directly from the supplier to the customer. How much revenue would eBay recognize at the time of the sale? Why?

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Answer #1

As per the IFRS 15, "revenue from contracts with customers", the seller/ supplier should recognise the revenue when the performance obligation to the contract is satisfied. The performance obligation is considered to be satisfied, when the customer obtained control over the good or service.

A) In the first case, where ebay is selling the used goods to customers at $300 by purchasing it from supplier for $200...the ebay is obtaining control over the goods from supplier by paying 200$ to them initially ...hence this satisfies the sale between ebay and supplier......since ebay purchased the goods from supplier at $200 and sells to customers at $300, it has to book purchase cost of $200 at the time of payment to supplier and has to recognise revenue from sale at $300 in statement of profit or loss.

B) In the second case, where ebay never obtained control over the goods. It means no sale happened between supplier and ebay. Hence ebay cannot book purchase cost of $200...the transaction seems to be more like a principal and agent transaction, where ebay acts as an agent to supplier and sells the goods on his behalf...Hence on sale to customers at $300..the ebay has to recognise the difference of $100 as commission received in the year of sale in statement of profit or loss.

C) In the third case, where ebay is obligated to pay $200 to supplier irrespective of sale happening, it can also be treated as sale. Ebay is paying the amount but not obtaining the physical possession of the goods. However, since it paid the amount, the supplier is obliged to deliver the goods as per the instruction of ebay when ever required. Further supplier cannot use the bicycle for any other purpose. Hence control is deemed to be transferred. As mentioned in case A, similarly ebay should recognise revenue of $300 on sale and purchase cost of $200..the goods will be in stock of ebay until they are sold.

Hope it helps,

Thanks u.

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