ACCT400A Exam 2

new revenue recognition standard by FASB

"Revenue from contracts with customers" provides a unified approach that replaces more than 200 different pieces of specialized guidance that had developed over time in U.S. GAAP for revenue recognition under various industries and circumstances

sales discounts

-reductions in the amount to be paid by the credit customer if paid within a specified period of time -intended to provide incentive for quick payment 2/10, n/30

cumulative revenue to be recognized to date

(total estimated revenue x % completed to date)

Five Dollar Stores (FDS) sells merchandise for cash. It began 2021 with a refund liability of $0, made sales of $1,000,000 during 2021 which cost FDS $600,000 (or 60%), estimates that 1% of all sales will be returned, and experiences $8,000 of returns during 2021. When accruing its estimate of remaining returns at the end of 2021, FDS would debit sales returns and credit the refund liability for:

$1,000,000 × 1% = $10,000 $10,000 − $8,000 = $2,000

revenue recognized this period =

(total estimated revenue x % completed to date) - revenue recognized in prior periods

Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue over time according to percentage of completion. Here are some facts: 2021 costs incurred: 3,000,000 estimated additional cost to complete: 6,000,000 What is Robertson's percentage completion in 2021?

$3M ÷ ($3M + $6M) = 33.33% (or 1/3) complete.

Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue over time according to percentage of completion. Here are some facts: 2021 costs incurred: 3,000,000 estimated additional cost to complete: 6,000,000 How much revenue would Robertson recognize in 2021?

$3M ÷ ($3M + $6M) = 33.33% (or 1/3) complete. $12M × 1/3 = $4M revenue recognized in 2021.

when there is a single obligation

-no allocation is required recognized revenue at a point in time or over a period of time

not separate performance obligations

-prepayments -quality-assurance warranties (part of the performance obligation to deliver products of acceptable quality) -right of return (represents a potential failure to satisfy the original performance obligation to provide goods that the customer wants to keep)

franchises

-In a franchise arrangement, a franchisor grants to the franchisee the right to sell the franchisor's products and use its name for a specified time period -Franchises often include a license to use intellectual property, as well as initial sales of products and services transferred at the start of the franchise as well as ongoing sales over the life of the franchise. -•Franchisor must evaluate each part of the franchise agreement to identify the performance obligations.

allowance method

-Required by GAAP whenever the amount of bad debts is material. -Companies use a contra-asset account, the allowance for uncollectible accounts, to reduce the carrying value of accounts receivable to the amount of cash they expect to collect. -Both the carrying value and the amount of the allowance typically are shown on the face of the balance sheet.

Gift Cards

-Sales of gift cards are recognized as deferred revenue liability and then, -Revenue is recognized when a gift card is redeemed or the likelihood of redemption is viewed as remote.

inventory turnover

-Shows the number of times the average inventory balance is sold during a reporting period -Indicates how quickly inventory is sold Average days in inventory measures the number of days it typically takes to sell inventory

Consignment Arrangements

-The "consignor" physically transfers the goods to the other company (the consignee), but the consignor retains legal title. -If a buyer is found, the consignee remits the selling price (less commission and approved expenses) to the consignor. -If the consignee can't find a buyer within an agreed-upon time, the consignee returns the goods to the consignor. -Given that the consignor retains the risks of ownership, it postpones revenue recognition until sale to a third party occurs.

trade discounts

-a percentage reduction from the list price -quantity discounts to large customers

when there are multiple obligations

-allocate a portion of each performance obligation -recognize revenue at whatever time is appropriate for each performance obligation

Bill-and-Hold Sales

-an arrangement where a customer purchases goods but requests that the seller not ship the product until a later date. -Since the customer doesn't have physical possession of the asset until the seller has delivered it, transfer of control has not occurred, so revenue typically should not be recognized until actual delivery to the customer occurs. -Specific criteria must be met recognize revenue before delivery

balance sheet approach

-base bad debt expense on the appropriate carrying value of accounts receivable -company estimates what the ending balance of the allowance for uncollectable account should be, and then records the amounts of bad debt expense necessary to adjust the allowance to that desired balance

right of return

-exists when the customer can return the food if not satisfied or unable to resell it -viewed as a failure to satisfy the original performance obligation -sellers report net sales revenue in the income statement, equal to gross sales revenue less actual and estimated returns

methods of estimation

-expected value -most likely amount -select method based on ability to best predict the amount the seller will receive

separate performance obligations:

-extended warranties (the customer has the option to purchase this separately or provides a service beyond quality assurance) -options provide a material right (something the customer would not receive otherwise)

some common arrangements can have complicated revenue recognition timing

-franchises -bill-and-hold arrangements -consignment arrangements -gift cards

a contract exists if it:

-has commercial substance -has been approved by the seller and customer -specifies the rights of the seller and customer -specifies payment terms -is probable that the seller will collect the amount it is entitled to receive under the contract

a contract does not exist if:

-neither the seller nor the customer has performed any obligations under the contract, and -both the seller and the customer can terminate the contract without penalty

discount on note receivables:

-represents future interest revenue that will be recognized over time -is a contra account to the note receivable account

cash equivalents

-short term, highly liquid investments, readily convertible to cash with little risk of loss -have a maturity date no longer than 3 months from the date of purchase -examples: money market funds, treasury bills, and commercial paper

various approaches are available to estimate stand-alone selling prices

1. adjusted market assessment approach: price if the product or services were sold in the market 2. expected cost plus margin approach: estimate the costs of satisfying a performance obligation and then add an appropriate profit margin 3. residual approach: subtract the sum of the known or estimated stand-alone selling prices of other goods and services in the contract from the total transaction price of the contract

recognizing revenue at single point in time - a customer is more likely to control a good or service if the customer has:

1. an obligation to pay the seller 2. legal title to the asset 3. physical possession of the asset 4. assumed the risks and rewards of ownership 5. accepted the asset

identify the performance obligation(s): a good or service is distinct if it is both...

1. capable of being distinct 2. separately identifiable from other goods or services in the contract construction contracts are not separately identifiable since each step is dependent of prior work

financial statement analysis: various tools and techniques are needed to formulate predictions. common methods include:

1. comparative financial statements 2. horizontal analysis 3. vertical analysis 4. ratio analysis

liquidity ratios

1. current ratio 2. acid-test ratio (or quick ratio) These ratios provide information about a company's ability to pay its short-term obligations

if the time value of money is significant part of the contract, the seller should view the transaction price as consisting of two components:

1. delivery component, equal to the cash price of the good and service, and 2. a financiing component, which is interest considered paid to the customer (in the case of a prepayment) or the seller (in the case of a receivable) sellers can assume the financing component is not significant if the period between the delivery and payment is less than a year

special issues in revenue recognition

1. specific requirements for contract existence 2. prepayments, warranties, customer options for additional goods or services 3. variable consideration, right of return, seller as principal or agent, time value of money, payments by seller to customer 4. various approaches to estimated stand-alone selling prices 5. licenses, franchises, bill-and-hold arrangements, consignment arrangements, gift cards

recognizing revenue over a period of time - revenue is recognized over a period of time if any of the following three criteria is met:

1. the customer consumes the benefit of the seller's work as it is performed (cleaning service) 2. the customer controls the asset as it is created (a contractor builds an extension onto a customer's existing building) 3. the seller is creating an asset that has no alternative use tot he seller and the seller has the legal right to receive payment for progress to date (an order of jets customized for the US air force)

estimating the transaction price involves a variety of considerations, including

1. variable consideration and the constraint on its recognition 2. sales with a right of return (a particular type of variable consideration 3. identifying whether the seller is acting as a principal or an agent 4. time value of money 5. payments by the seller to the customer

Berkley Associates uses the balance sheet approach to estimate bad debts expense. It started 2021 with a credit balance of $10,000 in its allowance for uncollectible accounts. Berkley wrote off $200,000 of bad debts during 2021, and its aging of accounts receivable at 12/31/21 indicates it should have a credit balance of $5,000 in the allowance for uncollectible accounts. No other journal entries to the allowance have been made. Berkley's journal entry to record bad debts expense should include a:

10,000 (200,000) + ? =5,000 ? = 195,000 Dr. Bad Debt Exp Cr. AFDA

Allen Co. wrote a contract that involves two performance obligations. Product A has a stand-alone selling price of $100, and product B has a stand-alone selling price of $200. The price for the combined product is $240. How much of the transaction price would be allocated to the performance obligation for delivering product A?

100/300 = .33 .33 x 240 = $80

Harrington's Pet Supplies begin the year with an inventory balance of $220,000. At year-end, the inventory balance was $185,000. Cost of goods sold for the year was $900,000. Calculate the inventory turnover ratio and average days in inventory (round to two decimals).

900,000/((220,000+185,000)/2) = 4.44 365/4.44 = 82.21

average collection period

An extension of the receivables turnover ratio Shows the approximation of the number of days the average accounts receivable balance is outstanding Indicates the average age of accounts receivable

five steps to revenue recognition

COPAR 1. identify the contract 2. identify the performance obligation(s) 3. determine the transaction price 4. allocate the transaction price 5. recognize revenue when (or as) each performance obligation is satisfied

restricted cash

Cash that is restricted in some way and not available for current use specific purpose example: for plant expansion contractually imposed example: debt instruments require the borrower to set aside funds

net method journal entries

Dr. A/R Cr. Revenue -for the amount less the discounted price If they take the discount: Dr. Cash Cr. A/R If they end up not taking the discount: Dr. Cash Cr. A/R Cr. Sales discounts forfeited

gross method journal entries

Dr. A/R Cr. Revenue -for the full amount (no discount) If they end up taking the discount: Dr. Cash Dr. Sales Discounts Cr. A/R -cash is the discounted amount if they pay the non-discounted amount: Dr. Cash Cr. A/R

percentage of completion journal entries: four key journal entries

Dr. CIP Cr. Cash this entry records the costs incurred on the project each year Dr. A/R Cr. Billings on contract this entry records the invoices issues to the customer each year Dr. Cash Cr. A/R this entry records the cash collected from the customer each year Dr. CIP (profit) Dr. Construction expense Cr. Construction revenue this entry records the revenue, profit, and expense earned each year Dr. Billings on contract Cr. CIP this entry occurs in the final year to close out the billings and CIP accounts

On December 1, 2021, the Santa Teresa Glass Company borrowed $500,000 from Finance Bank and signed a promissory note. Interest at 12% is payable monthly. The company assigned $620,000 (since some will be uncollectable) of its receivables as collateral for the loan. Finance Bank charges a finance fee equal to 1.5% of the accounts receivable assigned. record the journal entries

Dr. Cash Dr. finance charge expense Cr. liability - financing arrangement cash is debited by the difference between the 500,000 loan and the expense (500,000 - 9,300) the expense is debited by the A/R amount multiplied by the 1.5% (620,000 x 1.5%) liability is credited by the loan amount of 500,000

In December 2021, the Santa Teresa Glass Company entered into the following factoring arrangement with Factor Bank: •Santa Teresa transferred accounts receivable that had a book value of $600,000. (credit AR to get rid of it) •The transfer was made without recourse. •Factor immediately remitted to Santa Teresa cash equal to 90% of the factored amount. •Factor retains the remaining 10% to provide a cushion against potential sales returns and allowances. •A fee of 4% of the amount of receivables factored will be charged and taken from the amount retained. •Santa Teresa estimates the fair value of the last 10% of the receivables to be collected is equal $50,000.

Dr. Cash (600,000 x 90%) Dr. receivable from factor (50,000 - 24,000 fee) Dr. loss on sale of receivables (plug) Cr. A/R 600,000 (full value)

Assume the same facts as in the previous illustration, except that Santa Teresa sold the receivables to Factor with recourse and estimates the fair value of the recourse obligation to be $5,000.•Santa Teresa transferred accounts receivable that had a book value of $600,000. (credit AR to get rid of it) •The transfer was made without recourse. •Factor immediately remitted to Santa Teresa cash equal to 90% of the factored amount. •Factor retains the remaining 10% to provide a cushion against potential sales returns and allowances. •A fee of 4% of the amount of receivables factored will be charged and taken from the amount retained. •Santa Teresa estimates the fair value of the last 10% of the receivables to be collected is equal $50,000.

Dr. Cash (90% x 600,000) Dr. Receivable from factor (50,000 - 24,000) Dr. loss on sale of receivables (plug) Cr. Recourse liability 5,000 Cr. A/R 600,000

Jada Co. borrows $100,000 on January 1 from NorthEast Bank at a 12% interest rate. Jada assigned $140,000 of its accounts receivable as collateral, and agreed to pay a financing fee of 2% of accounts receivable assigned. On January 1, Jada's accounting for this transaction will include:

Dr. Cash (plug) Dr. Finance expense (140,000 x 2%) Cr. Liability 100,000

During 2021, its first year of operations, the Hawthorne Manufacturing Company sold merchandise for $2,000,000 cash. This merchandise cost Hawthorne $1,200,000 (60% of the selling price). Industry experience indicates that 10% of all sales will be returned, which equals $200,000 ($2,000,000 × 10%) in this case. Customers returned $130,000 of sales during 2021. Hawthorne uses a perpetual inventory system. Sales of $2,000,000 occurred in 2021, with cost of goods sold of $1,200,000.

Dr. Cash 2,000,000 Cr. Sales Revenue 2,000,000 Dr. COGS 1,200,000 Cr. Inventory 1,200,000 journal entry to actual returns during the year Dr. Sales returns 130,000 Cr. Cash 130,000 Dr. Inventory 78,000 Cr. COGS 78,000 adjusting year end entry to accrue remaining estimated returns: Dr. Sales returns 70,000 Cr. refund liability 70,000 Dr. inventory -est. returns 42,000 Cr. COGS 42,000

Santa Teresa will continue to collect the receivables, and will record any discounts, sales returns, and bad debt write-offs, but will remit the cash to Finance Bank, usually on a monthly basis. Assume $500,000 of the receivables assigned are collected in December.

Dr. Cash 500,000 Cr. A/R 505,000 Dr. Interest expense 5,000 Dr. liability 500,000 Cr. Cash 505,000 500,000 x 12% x 1/12

TrueTech Industries sells one-year subscriptions to the Tri-Net multiuser platform of Internet-based games. TrueTech sells 1,000 subscriptions for $60 each on January 1, 2021. Journal entry at contract inception:

Dr. Cash 60,000 Cr. Deferred Revenue 60,000

At the end of each of the 12 months following the sale, TrueTech would record the following entry to recognize Tri-Net subscription revenue:

Dr. Deferred Revenue 5,000 Cr. Service Revenue 5,000 60,000 / 12

The Stridewell Wholesale Shoe Company manufactures athletic shoes that it sells to retailers. On May 1, 2021, the company sold shoes to Harmon Sporting Goods. Stridewell agreed to accept a $700,000, 6-month, 12% note in payment for the shoes. Interest is receivable at maturity. Assume that an interest rate of 12% is appropriate for a note of this type. Record the journal entries:

Dr. N/R 700,000 Cr. Sales Revenue 700,000 Dr. Cash 742,000 Cr. Interest Revenue 42,000 Cr. N/R 700,000 700,000 x 12% x 6/12 = 42,000 if the sale occurs on August 1, 2021, and the company's fiscal year-end is December 31, a year end adjusting entry accrues interest earned Dr. interest receivable 35,000 Cr. interest revenue 35,000 Dr. Cash 742,000 Cr. Interest Revenue 7,000 Cr. Interest receivable 35,000 Cr. N/R 700,000 700,000 x 12% x 1/12 = 35,000

Stridewell Shoe Company sold shoes to Harmon Sporting Goods on January 1, 2021, accepting a $700,000, two-year non-interest bearing note in payment for the shoes, assuming a 12% effective interest rate. Record the journal entries

Dr. N/R 700,000 Cr. discount on note receivable (plug #) Cr. Sales revenue (700,000 x 0.79719) PV of 1, i=12%, n=2 Dr. Discount on note receivable 66,964 Cr. interest revenue 66,964 (carrying value multiplied by interest rate of 12%) Dr. Cash 700,000 Dr. discount on note receivable 75,000 Cr. interest revenue 75,000 Cr. N/R 700,000 (interest rev and discount = new carrying value multiplied by the interest rate)

Journal entries for allowance method

Estimate Dr. Bad Debt Expense Cr. AFDA write off Dr. AFDA Cr. A/R subsequent collection (rare) Dr. A/R Cr. AFDA Dr. Cash Cr. A/R

CECL ("current expected credit loss") model

Estimates should consider all receivables and be based on all relevant information, including historical experience, current conditions, and reasonable and supportable forecasts. This method is required starting 2020. -Analyzing each customer account. -Applying an estimate of the percentage of bad debts to the entire outstanding receivable balance. -Applying different percentages to accounts receivable balances depending on the length of time outstanding.

estimates of AFDA

Estimation could be done by analyzing each customer account, by applying an estimate of the percentage of bad debts to the entire outstanding receivable balance, or by applying different percentages to accounts receivable balances depending on the length of time outstanding. This latter approach employs an accounts receivable aging schedule, and is very common in practice.

Liquidity

Liquidity most often refers to the ability of a company to convert its assets to cash to pay its current obligations.

activity ratios - profitability analysis

One key to profitability is how well a company manages and utilizes its assets -The higher the ratio, the fewer assets are required to maintain a given level of activity (revenue) 1. asset turnover ratio 2. receivables turnover ratio 3. inventory turnover ratio 4. average collection period 5. inventory turnover ratio 6. average days in inventory

profitability ratios

Profitability ratios attempt to measure a company's ability to earn an adequate return relative to sales or resources devoted to operations 1. profit margin 2. return on assets 3. return on equity

net method income statement

Sales Revenue + Discounts forfeited =Net Sales Revenue

Assume that TrueTech sold 1,000 Tri-Boxes to CompStores for $240 each. TrueTech estimates that CompStores will return five percent of the Tri-Boxes purchased.

Sales Revenue 240,000 Less: estimated returns (5%) (12,000) Net Sales Revenue 228,000

gross method income statement

Sales revenue (sales discounts) =Net sales revenue

non-interest bearing notes

Sometimes a receivable assumes the form of a so-called non-interest-bearing note. The name is a misnomer, though. Non-interest-bearing notes actually do bear interest, but the interest is deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower at the outset.

short-term interest-bearing notes

The typical interest-bearing note receivable requires collection of a specified face amount, also called principal, at a specified maturity date or dates. In addition, interest is received at a stated percentage of the face amount. Interest on notes is calculated as: Face amount × Annual rate × Fraction of the annual period

solvency ratios

These provide some indication of the riskiness of a company with regard to its ability to pay its long-term debts 1. debt to equity ratio 2. times interest earned ratio

secured borrowing

Under this approach, the transferor (borrower) simply acts like it borrowed money from the transferee (lender), with the receivables remaining in the transferor's balance sheet and serving as collateral for the loan. On the other side of the transaction, the transferee recognizes a note receivable. -no special accounting treatment is needed

sale of receivables

Under this approach, the transferor (seller) "derecognizes" (removes) the receivables from its balance sheet, acting like it sold them to the transferee (buyer). On the other side of the transaction, the transferee recognizes the receivables as assets in its balance sheet and measures them at their fair value. -accounting treatment is similar to that of the sale of other assets

relationship between risk and profitability

While there are default risks associated with borrowing, a company can use those borrowed funds to provide greater returns to its shareholders -This is referred to as favorable financial leverage and is a very common (but risky) business activity When a company needs money, the alternatives are debt and equity -Sometimes more debt can mean a higher return on shareholders' equity

Sale of receivables

accounting treatment is similar to accounting for the sale of other assets: the seller: -removes the receivables from the accounts -recognizes at fair value any assets acquired by the seller in the transaction -records the difference as a gain or loss (most of the time it will be a loss)

Braun Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Braun has a long history selling these computers under this returns policy and can provide precise estimates of the amount of returns associated with each sale. Braun most likely should recognize revenue: a. When Braun delivers a computer to a customer, ignoring potential returns. b. When Braun delivers a computer to a customer, in an amount that is reduced by the expected returns. c. When a customer returns a computer. d. When Braun receives cash from the customer.

b. Braun can estimate returns reliably enough for the constraint on recognizing variable consideration to not apply, so Braun would adjust the transaction price for expected returns and recognize revenue in that amount upon delivery.

Which of the following is not an indicator that control of a good has passed from the seller to the buyer? a. Buyer has legal title. b. Buyer has an unconditional obligation to pay. c. Buyer has scheduled delivery. d. Buyer has assumed the risk and rewards of ownership.

c

Which of the following is not true about recording sales discounts? a.The gross method records sales discounts taken when payment occurs during the discount period b.The net method records sales discounts not taken as sales discounts forfeited c.Net sales revenue is higher under the gross method than under the net method d.Net sales revenue is the same under both methods

c net sales revenue is the same number under both methods

Which of the following is not a step used to apply the core principle of revenue recognition? a. Determine the transaction price. b. Identify the performance obligations in the contract. c. Identify the contract with a customer. d. Ensure the sales price is fixed and determinable.

d

Which of the following transactions would increase a company's liquidity ratios? a. Receive cash from customers on accounts receivable b. Purchase office supplies with cash c. Pay dividends to shareholders d. Borrow cash by signing a three-year note

d

horizontal analysis

each item is presented as a percentage of a base year amount

vertical analysis

each item is presented as a percentage of a total

income statement approach

estimate bad debt expense directly as a percentage of each period's net credit sales -percentage usually is determined by reviewing the company's recent history of the relationship between credit sales and actual bad debts

ratio analysis

financial statement items are converted to ratios

comparative financial statements

financial statements are presented for the preceding year and often the previous two years

percentage of completion financial statements

income statement -construction revenue -construction expense -profit these amounts are derived from the fourth journal entry balance sheet current assets: -A/R -CIP > Billings current liabilities: -Billings > CIP A/R is always an asset report net balance as asset if CIP > billings

periodic loss

occurs for a project that is projected to be profitable overall

to recognized revenue over time, a seller needs to estimate progress towards completioin

output-based estimate: measured as the proportion of the goods or services transferred to date input-based estimate: measured as the proportion of effort expended thus far relative to the total effort expected to satisfy the performance obligation

agent

performance obligation: -to facilitate a transaction between a principal and a customer recording revenue: -only the commission it receives on the transaction

principal

performance obligation: -to provide goods and services (so is vulnerable to risks associated with holding inventory) recording revenue: -total sales price paid by customers -also recognizes COGS

we worry about two types of contract losses:

periodic loss and overall loss sellers must update their estimates and recognize losses as necessary, but the specifics depend on the timing of revenue recognition

variable consideration

portion of a transaction price depends on the outcome of future events examples: construction (incentive payments) entertainment and media (royalties) health care (medicare and medicaid) reimbursements manufacturing (volume discounts and product returns) telecommunications (rebates)

overall loss

projected to occur for the entire project

decision makers' perspective: receivables management ratios

receivables turnover ratio average collection period these are designed to monitor receivables

problems with applying the realization principle:

revenue recognition was poorly tied to the FASB's conceptual framework focus on the earnings process led to similar transactions being treated differently in different industries difficult to apply to complex arrangements that involved multiple goods or services

the core revenue recognition princple

states that companies must recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services when: upon transfer to customer how much: amount the seller is entitled to receive

accounting for long-term contracts

steps 2 and 5 are critical for long-term contracts -Usually have a single performance obligation, because don't meet the "separately identifiable" criterion necessary for goods and services to be viewed as distinct. -Recognizing revenue over time according to the progress toward completion. (long-term contracts often qualify) -recognizing revenue upon contract completion

Bad Debt Expense

under the allowance method: -is not recognized when specific accounts are written off -is recognized earlier, when accounts are estimated to be uncollectible -later, when a specific account receivable is deemed actually uncollectible, both the allowance and the specific account receivable are reduced to write off the receivable

a company sells accounts receivable WITHOUT recourse

the buyer can't ask the seller for more money if the receivables prove to be uncollectible

prior GAAP: the realization principle required that revenue be recognized when both:

the earnings process is virtually complete, and there is reasonable certainty as to the collectability of the assets to be received

a company sells for accounts receivable WITH recourse

the seller retains all of the risk of bad debts -to compensate the seller for retaining the risk of bad debts, the buyer usually charges a lower factoring fee

gross method

we assume the customer will not take the discount

net method

we assume the customer will take the discount and pay in time

On January 1, 2021, TrueTech enters into a contract with GameStop Stores to deliver four $240 Tri-Box modules that have a combined fair value of $960. •Receivable Case: TrueTech delivers the modules on January 1, 2021, and GameStop agrees to pay TrueTech $1,056 on December 31, 2021.

when delivery occurs: Dr. N/R 1,056 Cr. Discount on N/R 96 Cr. Sales Revenue 960 1,056 x 0.90909 PF of 1, n = 1, i=10% when subsequent collection occurs: Dr. Cash 1,056 Dr. Discount on N/R 96 Cr. Interest Rev 96 Cr. N/R 1,056

when is a transferor allowed to treat a transfer as a sale?

when the company (the transferor) has surrendered control over the assets transferred