Question

Jada Morgan recently purchased on lay-a-way a big screen television from Walmart. Jada paid $200 as a cash deposit on the television. The television cost Walmart $2,000 and has a total retail price of $3,500. Walmart has set the television aside pending the payment by Jada of the balance owed. Walmart require its customers to enter into an installment note or other fixed payment agreement when the initial deposit is received. Merchandise on layaway generally is not released to the customer until the customer pays th full purchase price. If the customer fails to pay the remaining purchase price, the customer forfeits his or her cash deposit. In the event the merchandise is lost, damaged or destroyed, Walmart either must refund the cash deposit or provide replacement merchandise.

When should Walmart recognize the revenue from the sale to Jada? Justify your answer.

Answer 1

Walmart as a retailing store has several policies to be considered while entering into credit transactions they are:

• The customer has to pay an initial cash deposit for the purchase.
• The customer needs to enter into an installment note or other payment agreement.
• The bought product will only be delivered after full payment of the purchase price.

There are resons for the company to follow these rules in credit sales, if a customer fails to pay the full price of the bought product and if it was delivered to the customer at the time of initial cash deposits ,the company losses the initial cash deposits paid by the customer as it is forfeited by the customer on non-payement of the full amount. The company also has to bear the loss of any damage or collateral happening to the product,which in turn is a losss for the company.

In this case, Jada Morgan has entered into a transaction with Walmart on a credit basis. Jada Morgan has paid an initial cash deposit of 200$. Jada is expected to pay her full purchase price of 3500$ in installments.

Considering the policies of walmart we can conclude that delivery of the product will only be after full payment of the purchase price.The company has not transfeered the ownership to Jada because of partial payment.

According to the Revenue Recognition Principle, revenues are recognized if they are realized or realizable . Revenues must also be earned (usually occurs when goods are transferred or services rendered), regardless of when cash is received. For companies that don’t follow accrual accounting and use the cash-basis instead, revenue is only recognized when cash is received.

Taking into consideration the credit selling policy of Walmart and the general Revenue Recognition Principle, we can conclude that Walmart should recognize the revenue from sale only after the full payment is made by Jada Morgan and after the delivery is made to Jada Morgan.

Hence, we can conclude that Walmart should only recognize the revenue from Jada only after full payment for the television is made and its delivery is provided.