Question

Question: CA18-7 (Recognition of Revenue—Bonus Points) Griseta & Dubel Inc. was formed early this year to sell merchandise credits to merchants, who distribute the credits free to their customers. For example, customers can earn additional credits based on the dollars they spend with a merchant (e.g., airlines and hotels). Accounts for accumulating the credits and catalogs illustrating the merchandise for which the credits may be exchanged are maintained online. Centers with inventories of merchandise premiums have been established for redemption of the credits. Merchants may not return unused credits to Griseta & Dubel.

The following schedule expresses Griseta & Dubel’s expectations as to the percentages of a normal month’s activity that will be attained. For this purpose, a “normal month’s activity” is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. The company expects that this level will be attained in the third year and that sales of credits will average $6,000,000 per month throughout the third year.

Month	Actual credit sale Percent	Merchandise premium purchased percent	Credit Redemption percent
6th	30%	40%	10
12th	60	60	45
18th	80	80	70
24th	90	90	80
30th	100	100	95

Griseta & Dubel plans to adopt an annual closing date at the end of each 12 months of operation.

Instructions

Provide balance sheet accounts that should be used and indicate how each should be classified.

Short answer

Answer

Balance sheet accounts include:

1. Inventory.

2. Performance obligations.

Step-by-step solution

Definition of Inventory

The balance sheet asset that reflects the goods available with the business for sale is known as inventory. It also includes the raw material and work-in-process that will get converted into finished goods.

Balance Sheet Account

Inventory: Inventory will report the amount of premium available with the business entity on the asset side of the balance sheet.

Performance obligation: The business entity will report performance obligation as a liability account in the balance sheet.