Reference no: EM132746769

Question - Furniture Ltd. purchases units of wood frames that have manufacturer's volume rebates from Chasers Inc. The rebate requires Furniture Ltd to purchase a minimum number of units in a calendar year. The initial unit cost of each wood frame is $3.50 before any rebate.

If more than 2,500 units are purchased, the rebate is $0.35 per unit for all units purchased beyond the base amount of 2,500 units. Furniture Ltd. has a June 30 fiscal year end. By June 30, 2020, Furniture Ltd had purchased 2,000 wood frames for the six-month period from January 1, 2020, to June 30, 2020. Furniture Ltd estimates that an additional 2,000 wood frames will be purchased from July 1, 2020, to December 31, 2020. Furniture Ltd's management is very confident that this estimate will be confirmed by future purchases from Chasers.

Required -

a. Briefly explain the conceptual principles involved in determining if an accrual should be made for the volume rebate from Chasers. Under what circumstances would an accrual not be permissible?

b. Calculate the amount of any rebate that Furniture Ltd. should accrue at June 30, 2020, assuming the rebate cannot be cancelled by Chasers.

c. Calculate the unit cost that Furniture Ltd. should use in the costing of wood frames, using the perpetual inventory system.