PROBLEM – GENERATOR INDUSTRIES

Generator Industries manufactures emergency power equipment. Its most popular generator is
a model called the E-Booster, which has a retail price of P1,500 and costs Generator P740 to
manufacture. It sells the E-Booster on a standalone basis directly to businesses, as well as
provides installation services. Generator also distributes the E-Booster through a consignment
agreement with Lenz Home Store. Income data for Generator's first quarter of 2019 from
operations other than the E-Booster generator are as follows.

Revenues P6,500,000
Expenses 4,350,000

Generator Industries has the following information related to four F-Booster revenue
arrangements during the first quarter of 2019.

1) Generator Industries entered into an arrangement with the Grocers Co-op to deliver F-
Boosters for the meat lockers in the grocers' stores. Generator Industries provides a 5%
volume discount for E-Boosters purchased by Grocers Co-op if at least P450,000 of E-
Boosters are purchased during 2019. By March 31, 2019, Generator Industries has made
sales of P360,000 (P1,500 x 240 generators) to Grocers Co-op. Based on prior experience
with this promotion in two neighboring states, the discount threshold is met for the year if
more than one-half of the target had been met by mid-year.

2) On January 1, 2019, Generator Industries sells 20 E-Boosters to Nick's Liquors. Nick's

signs a 6-month note due in 6 months at an annual interest rate of 12%. Generator
Industries allows Nick's to return any F-Boosters that it cannot use within 120 days and
receive a full refund. Based on prior experience, Generator Industries estimates that
three units will be returned (using the most likely outcome approach). Generator's costs
to recover the products will be immaterial, and the returned generators are expected to be
resold at a profit. No F-Boosters have been returned as of March 31, 2019, and
Generator Industries still estimates that three units will be returned in the future.

3) Generator Industries sells 30 F-Boosters to First Bank, to provide uninterrupted power

for bank branches with ATMs, for a total contract price of P50,000. In addition to the F-
Boosters, Generator Industries also provides installation at a standalone selling price of
P200 per F-Booster; the cost to Generator Industries to install is P150 per F-Booster. The
F-Boosters are delivered and installed on March 1, 2019, and full payment is made to
Generator Industries.

4) Generator Industries ships 300 E-Boosters to Lenz Home Store on consignment. By

March 31, 2019, Lenz Home Store has sold three-fourths of the consigned merchandise at
 the listed price of P1,500 per unit. Lenz Home Store notifies Generator Industries of the
sales, retains an 8% commission, and remits the cash due to Generator Industries.

INSTRUCTION

a. Determine net income for Generator Industries for the first quarter of 2019. (Ignore
taxes.)

b. In reviewing the credit history of Nick's Liquors, Generator Industries has some
concerns about the collectibility of the full amount due on the note. Briefly discuss
how collectibility of the note affects revenue recognition and income measurement for
Generator Industries.

ANSWER:
A.
1.Sales revenue [95% × (1,500 × 240)] 342,000
Cost of goods sold ($740 × 240) 177,600
Gross profit
164,400

2.Sales revenue (20 × 1,500) 30,000

Less: Estimated returns (3 × 1,500) 4,500
Net sales 25,500
Cost of goods sold (17 × 740) 12,580
Gross profit 12,920
Interest revenue (30,000 × 12% × 3/12) 900
Net income on this arrangement 13,820

3.The total transaction price of 50,000 is allocated between the equipment and
installation. The transaction price for the equipment and installation is allocated based
on relative standalone selling prices:Equipment: 44,118 = (45,000 ÷ 51,000*) × 50,000
Installation: 5,882 = (6,000 ÷ 51,000) × 50,000
*45,000 + 6,000

Sales revenue 44,118

Cost of goods sold (30 × 740) 22,200
Gross profit 21,918
Installation revenue 5,882
Installation expense (30 × 150) 4,500
Net profit 1,382
Net income on this arrangement 23,300
4.Sales revenue (225 × 1,500) 337,500
Cost of goods sold (225 × 740) 166,500
Gross profit 171,000
Commission expense (337,500 × 8%) 27,000
Net income on this arrangement 144,000
Net income on E-Booster 345,520
300 × 75%

Outback Industries' net income for the quarter: 6,500,000 − 4,350,000

+345,520 = 2,495,520.

B.
Whether a company will get paid for satisfying a performance obligation isnot a
consideration in determining revenue recognition. That is, the amountrecognized is not
adjusted for customer credit risk. If significant doubt existsat contract inception about
collectibility, Outback reports the revenuegrossand then presents an allowance for any
impairment dueto bad debts, whichwill reduce net income and which is reported as an
operating expense in theincome statement.

LIWAG, JAICEL BERNICE E. BSA 3RD YR