Kingbird Company sells goods to Oriole Company during 2017 I

Kingbird Company sells goods to Oriole Company during 2017. It offers Oriole the following rebates based on total sales to Oriole. If total sales to Oriole are 9,300 units, it will grant a rebate of 2%. If it sells up to 20,600 units, it will grant a rebate of 4%. If it sells up to 32,300 units, it will grant a rebate of 6%. In the first quarter of the year, Kingbird sells 11,700 units to Oriole at a sales price of $117,000. Kingbird, based on past experience, has sold over 36,200 units to Oriole, and these sales normally take place in the third quarter of the year.

What amount of revenue should Kingbird report for the sale of the 11,700 units in the first quarter of the year.

Solution

It is given that sales of 11,700 units are made in the first quarter. It is also given that in past it has sold over 36,200 units and most of them are in thrid quarter. As per the current sales, we need to calculate the rebate at 4% and not 6% because of Prudence Principle. We should not expect future revenues until we have some valid proof to beleive. If the sale increases in the current year, then we can calculate the rebate of 6% on the entire sales made.

But as of now, rebate is to be calculated at 4%.

Revenue = $117,000 - ($117,000 x 4%) = $112,320

The above calculation is made in accordance with the generally accepted accounting principles which quotes that \"Revenue cannot be recognized until it is earned and realized or realizable\", in this case revenue for 3rd quarter sales is not earned as sale didn\'t take place yet.

Therefore, the amount of revenue to be recognized is $112,320.