Reference no: EM132693861

Question - JK Bakery is Expanding

J.K. bakery on the upper West Side was a huge success. Therefore, Jessica decided to expand her business into event catering, selling her main products to event organizers. At first, she plans to sell mini pistachio cakes and brownies. Her price for the mini cakes is $5 and for the brownies $1. On December 15, 2019, an order was placed for 200 mini pistachio cakes, and 100 brownies.

The customer argued that he was taking a chance on the small bakery because there was a baking critic present at the event. The customer wanted a discount of 40% if the critic rated the baked goods less than seven on a ten-point scale. The rating is not given until January 2020. Given the size of the order, Jessica agreed.

The customer paid in cash and Jessica delivered the baked goods on December 31, 2019.

Given the success of the bakery Jessica expects the likelihood of a rating below seven to be 20%.

Additional information: For this question assume that Jessica is an expert in her field, and therefore her estimates are reliable and can be used for any necessary computations.

Required -

a. When taking into consideration the new revenue recognition standard learned in class, U.S. GAAP Topic 606 (IFRS 15), how much revenue should J.K. bakery recognize at the time of the sale, on December 31, 2019?

b. What accounts are affected by the sale in part a. Please note the type of each account (asset, liability or equity) and whether it increased or decreased.

c. How would your answer to part a change if in addition to the potential discount Jessica offered a voucher to the client. The voucher was for 10% off a future order. For this question assume that Jessica estimates that the value of the customer's future order (before the use of a voucher) is $1,000, and that there is certainty (probability of 100%) the customer will use the voucher in 2020.