[whopper]

Hi all! There is a MC problem in the Wiley book (Ch.9 A Basic Concepts) that discusses revenue recognition for agricultural products that are homegenous and have an immediate marketability at quoted prices. (I have a 2011 book and its Q27). Below is the question and answer from the book. My question is what if the market priced dropped below $.70 in 2011? What would be the journal entry to correct previously recorded sales?

Q. Amar Farms produced 300,000 pounds of cotton during the 2010 season. Amar sells all of its cotton to Brye Company, which has agreed to purchase Amar’s entire production at the prevailing market price. Recent legislation assures that the market price will not fall below $.70 per pound during the next two years. Amar’s costs of selling and distributing the cotton are immaterial and can be reasonably estimated. Amar reports its inventory at expected exit value. During 2010, Amar sold and delivered to Brye 200,000 pounds at the market price of $.70. Amar sold the remaining 100,000 pounds during 2011 at the market price of $.72. What amount of revenue should Amar recognize in 2010?

A. $210,000. Income generally accrues only at the time of sale, and gains may not be anticipated by reflecting assets at their current sales prices. Exception to this general rule is granted, however, for agricultural products that are homogenous and have an immediate marketability at quoted prices such as cotton in this problem. When these inventories are stated at sales prices, they should be reduced by expenditures to be incurred in disposal. Amar Farms should, therefore, recognize revenue on the entire 300,000 pound crop in 2010 at the guaranteed (and prevailing) market price of $.70 per pound. This amounts to $210,000 (300,000 pounds * $.70 per pound). Note that the additional $.02 per pound for the cotton sold in 2011 would be recognized in 2011, since its selling price exceeded the current 2010 price.

REG - 89, 04/29/13
BEC - 81, 08/06/13
FAR - 84, 12/19/13
AUD - 82, 10/05/13