Revenue Recognition in Bill and Hold Transactions - Intermediate Accounting

This memo discusses the revenue recognition issues faced by ChemInc in Bill and hold transactions with Bond. It explains the conditions under which revenue can be recognized by ChemInc in case where the goods are not delivered to the buyer. The memo also provides journal entries for the transactions.

Running head: INTERMEDIATE ACCOUNTING
Intermediate accounting
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1INTERMEDIATE ACCOUNTING
To: Chemicals Incorporated
From: Karen M., Accountant
Subject: Revenue recognition
Date: 20th November 2018
The main objective of this memo is to focus on the issues faced by ChemInc while
recognising the revenue from the Bill and hold transactions entered with Bond. It will focus
on the conditions under which revenue can be recognized by ChemInc in case where the
goods are not delivered to the buyer.
Answer 1
Performance obligation is the promise in contract with the customer for transferring
the service or goods to customer. In case where the entity promises to transfer more than 1
item, the company shall account separate obligation for each product or service only when
the product is distinct. In the given case, MCA ordered by Bond will be considered as distinct
from other products as it requires special storage. Further, Bond entered into the Bill and hold
transaction with ChemInc. Here, in the given case ChemInc shall not recognize the revenue.
The reason behind this is that the delivery is not considered to be made unless the title has
been taken by the customer and assumed that all the rewards and risks associated with the
ownership of product has been transferred to the customer. Typically, the rewards and risks
associated with the product is transferred with the delivery of product to the delivery site of
the customer or it is shipped to the customer1.
1 Wagenhofer, Alfred. "The role of revenue recognition in performance reporting." Accounting and Business
Research44.4 (2014): 349-379.

2INTERMEDIATE ACCOUNTING
However, if the below mentioned conditions are satisfied, ChemInc can recognize the
revenue –
 Customer made fixed commitment for purchasing goods where written
communication is preferable2
 Buyer and not the seller shall request that transaction is on Bill and hold basis. Further
the buyer shall have significant business purpose to order the goods on the basis of
Bill and hold
 Delivery schedule must be fixed for the goods. Delivery date shall be reasonable and
shall be consistent with the business purposes of the buyer
 Seller shall not retain any type of obligation for specific performance like process of
earnings is not complete.
 Ordered product shall be segregated from seller’s inventory and shall be subjected to
be used for filling the orders
 Product manufacturing shall be complete and must be ready for shipment3
As the above mentioned conditions are satisfied, ChemInc can recognize the amount
received from Bond as revenue.
Answer 2
Even if ChemInc does not ship MCA till the end of year if the above mentioned
conditions are fulfilled it can recognise the received amount as revenue. Further, before
recognizing the revenue the below mentioned factors must be considered –
 Date by which payment is expected by the seller and whether any modifications is
made by the seller under normal billing and the terms of credit for the buyer
2 Dyson, Robert A. "Case studies in the new revenue recognition guidance." The CPA Journal 85.3 (2015): 22.
3 "FASB Accounting Standards Codification®." Asc.fasb.org. N. p., 2018. Web. 21 Nov. 2018.

3INTERMEDIATE ACCOUNTING
 Past experience of the seller with the customer and pattern of the bill and hold
transactions
 Whether any risk is expected regarding loss in case the value of the product decline in
the market4
 Whether the custodial risks of the seller are insured and insurable
 Whether extended procedure is required for assuring that no exceptions are there to
the commitment of buyer for accepting and paying for the goods.
Answer 3
Journal entries –
On December 31, 20X9
Bond $ 10,00,000
Sales revenue $ 8,00,000
Cost of goods sold $ 150,000
Inventory $ 150,000
On March 31, 20Y0
Cost of goods sold $ 150,000
Cost of goods sold – Bill and hold $ 150,000
4 "ASC 605 — Revenue Recognition." Iasplus.com. N. p., 2018. Web. 21 Nov. 2018.

4INTERMEDIATE ACCOUNTING
Reference
"ASC 605 — Revenue Recognition." Iasplus.com. N. p., 2018. Web. 21 Nov. 2018.
"FASB Accounting Standards Codification®." Asc.fasb.org. N. p., 2018. Web. 21 Nov. 2018.
Dyson, Robert A. "Case studies in the new revenue recognition guidance." The CPA
Journal 85.3 (2015): 22.
Wagenhofer, Alfred. "The role of revenue recognition in performance reporting." Accounting
and Business Research44.4 (2014): 349-379.