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BUSI3013 –Financial Accounting

Fall 2020

FINAL EXAMINATION SOLUTIONS

Question 1 (40 Points)

a. Using terms and concepts we learned in class, explain how Amazon recognizes revenues from Retail sales, Third-party seller services, and Subscription services. Points:9

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For retail sales, Amazon recognizes revenues from retail sales when control of the goods is transferred to the customer, which generally occurs upon our delivery to a third-party carrier or, in the case of an Amazon delivery, to the customer. As Amazon controls the sold goods before delivering to a customer, revenues are recognized based on gross revenue accounting.

For third-party seller services, the commissions and any related fulfillment and shipping fees are recognized when the services are rendered, which generally occurs upon delivery of the related products to a third-party carrier or, in the case of an Amazon delivery, to the customer. As Amazon do not control sold goods before delivering to a customer, revenues are recognized based on net revenue accounting.

For subscription services, subscriptions are paid for at the time of or in advance of delivering the services. Revenue from such arrangements is recognized over the subscription period.

b. In a few sentences, explain what are “unearned revenue”, how does Amazon record them in its financial statements, and what accounts are affected as Amazon performs service obligations over time? Points:6

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Unearned revenue is recorded when payments are received or due in advance of performing our service obligations and is recognized over the service period. Amazon likely keeps unearned revenue under the short-term liability as $6.3 billion out of $7.9 billion of total unearned revenue as of December 31, 2018 was recognized during 2019. Some of unearned revenue is included in “Other long-term liabilities”. Once Amazon performs promised obligations, it reduces unearned revenue and recognizes revenue.

c. On December 31, 2019, Amazon received $1,456 million in one-year Amazon Prime membership fees from customers. Show how Amazon would record the collection of these membership fees on December 31, 2019, and what accounting adjustment Amazon would record on March 31, 2020 (i.e., at the end of the first fiscal quarter of 2020), using journal entries, T-accounts, or the accounting equation method.  Points:8

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In $ million

Balance Sheet

Income Statement

Transaction

Cash Asset

+

Noncash Assets

=

Liabil- ities

+

Contrib. Capital

+

Earned Capital

Rev- enues

–

Expen-ses

=

Net Income

Collect $1,456 membership fees

+1,456

=

+1,456 (Unearned Revenue)

–

=

Record membership fees earned

=

-364 (Unearned Revenue)

+364 (Retained Earnings)

+364 (Revenue)

–

=

+364

d. On January 1, 2020, Amazon launched a new “laptop” in collaboration with Lenovo. To promote this new product, Amazon offers this laptop with the Amazon Echo smart speakers (Alexa), a free one-year warranty, and a free six-months Amazon Prime membership for $2,000. All these four components are considered distinct performance obligations. In the absence of any promotional offer, Amazon sells the new laptop for $2,200, the speaker for $100, the one-year warranty for $200, and the monthly Prime membership for $10. Record the sale (of one unit) of the new bundle on January 1, 2020, according to the new revenue recognition standard. You may use journal entries, T-accounts, or the accounting equation method Assume the customer pays in cash and Amazon purchased the laptop for $1500 and the speaker for $60 from suppliers in the previous fiscal year.  Points:17

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		Transaction Price (P)	2,000
		Stand-alone prices	Allocated prices
(1)	Laptop (P1)	2,200	1,719	[P1/(P1+P2+P3+P4)] * P
(2)	Speaker (P2)	100	78	[P2/(P1+P2+P3+P4)] * P
(3)	Warranty (P3)	200	156	[P3/(P1+P2+P3+P4)] * P
(4)	Prime (P4)	60	47	[P4/(P1+P2+P3+P4)] * P
	Sum	2,560	2,000

Upon the cash sale of the bundle, at the beginning of the fiscal year, Amazon records revenue for the laptop and speaker and defers the revenue for the warranty and membership:

dr. Cash 2,000

cr. Revenue 1,797 (1,719+78)

cr. Deferred Revenue 203 (156+47)

They also record the related cost

dr. COGS 1,560 (1,500+60)

cr. Inventory 1,560

 

Question 2 (20 points)

a. Depreciable assets only include equipment. Land is not subject to depreciation and neither are the other assets, based on the footnote. (4 points)

depreciable fixed assets (net) = equipment – accumulated depreciation

= 7,968 – 7,370 = 598

b. According to the cash flow data provided, the company added property and equipment of $337 in 2018 and sold none. The gross balance in 2017 was therefore: (4 points)

gross PPE (2018) = gross PPE (2017) + additions (2018) – disposals(2018) çè 

 8,982 = gross PPE (2017) + 337 – 0 çè 

gross PPE (2017) = 8,645

The cash flow statement further shows depreciation of $80 in 2018. Since no assets were retired or disposed, accumulated depreciation as of June 30, 2017, is therefore: (4 points)

accumulated depreciation (2018) = accumulated depreciation (2017) + depreciation (2018) çè 

7,671 = accumulated depreciation (2017) + 80 çè 

accumulated depreciation (2017) = 7,591

c. The cash flow statement shows proceeds from the sale of equipment of $34 and a gain on this transaction of $24. To determine the gross value of the sold equipment, note that: (8 points)

gross PPE (begin) + additions – disposals = gross PPE (end)

Inserting the values from footnote 6 and from the cash flow statement, we have:

8,982 + 444 – disposals = 8,979

The gross value of disposals is therefore $447. For accumulated depreciation, we have:

accumulated depreciation (begin) + deprecation expense – disposals = accumulated depreciation (end)

Inserting the values from footnote 6 and from the cash flow statement, we have:

7,671 + 136 – disposals = 7,370

The accumulated depreciation of the sold equipment is therefore $437, so the journal entry is:

DR cash	34
DR accumulated depreciation	437
CR gain on equipment disposals		24
CR equipment (gross)		447

Question 3 (20 points)

		Assets	=	Liabilities + Equity			Revenues	Expenses
Date	Description	Cash		Bonds Payable	Discount on Bond	Retained Earnings	Gain on Repurchase of Debt	Interest expense
Part a (5 points)
11/30/ 2017	Issue Bonds	880,219		1,000,000	-119,781
Part b (9 points)
11/30/2018	Interest expense and pay coupon	-50,000			20,418	-70,418		70,418
11/30/2019	Interest expense and pay coupon	-50,000			22,051	-72,051		72,051
Part c (6 points)
12/1/2019	Repurchase Bonds	-875,657		-1,000,000	77,313	47,030	47,030

Question 4 (20 points)

a. Write-offs are given as $73 in the last footnote table, which shows the movements in the allowance account. The related journal entry is: (5+5 points)

DR allowance for doubtful accounts	73
CR accounts receivable		73

This entry has no income statement effect.

The beginning and ending balances of the allowance are given as $609 and $3,957, respectively, in the first footnote table. The bad debt expense, corresponding to the item ‘additions, net of recoveries,’ is therefore:

bad debt expense = ending allowance + write-offs – beginning allowance = 3,957 + 73 – 609 = 3,421

The related journal entry is:

DR bad debt expense	3,421
CR allowance for doubtful accounts		3,421

This entry reduces sales revenue and thus net income.

b. The general formula linking the three numerical values in each column of the aging table is:

(10 points)

expected credit loss rate × estimated total gross carrying amount = lifetime ECL

The gross carrying values and the lifetime ECL rows must each sum across to yield the total amounts in the rightmost column. Using these conditions, we can populate the table to obtain: