Question

Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay \(2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters for 2 months at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the counters due to the delay, Stadium has provided a deposit of \)300,000.

Instructions

(a) Explain this type of revenue recognition transaction.

(b) What factors should be considered in determining when to recognize revenue in this transaction?

(c) Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time the $300,000 deposit.

Short answer

The sales revenue of Wood-Mode is $2,000,000.

Step-by-step solution

Bill-and-Hold Agreement

A bill-and-hold transaction occurs when a consumer pays for products and services before they are delivered to the client. It is a form of selling agreement in which products and services are not delivered to clients and are instead billed by the vendor.

Type of revenue recognition and journal entries for Wood-Mode

(a) This is an example of a bill-and-hold transaction. The buyer requests a delay in delivery of the counters, but the buyer accepts title and accepts billing. As a result, the agreement must be assessed to see if revenue may be recorded prior to delivery.

(b) If the following requirements are satisfied, revenue is recorded when the title passes:

• There must be a compelling justification for the bill-and-hold arrangement.
• The merchandise must be designated as the customer's property separately.
• The product must be ready for physical transfer to the buyer right now, and
• The seller must not be able to utilize or divert the product to another consumer.

(c) Journal entries:

Date	Particular	Debit ($)	Credit ($)
	Cash a/c	300,000
	Account receivables a/c		1,700,000
	Sales revenue a/c		2,000,000