Interpreting Financial Statement Disclosures Relating to Income Recognition. Deere & Company manufactures agricultural and industrial equipment and provides financing services for its independent dealers and their retail customers. In Note 2 to its October 31, 2012, 10K, Deere discloses the following revenue recognition policy:
Sales of equipment and service parts are recorded when the sales price is determinable and the risks and rewards of ownership are transferred to independent parties based on the sales agreements in effect. In the U.S. and most international locations, this transfer occurs primarily when goods are shipped. In Canada and some other international locations, certain goods are shipped to dealers on a consignment basis under which the risks and rewards of ownership are not transferred to the dealer. Accordingly, in these locations, sales are not recorded until a retail customer has purchased the goods. In all cases, when a sale is recorded by the company, no significant uncertainty exists surrounding the purchaser’s obligation to pay. No right of return exists on sales of equipment … Financing revenue is recorded over the lives of related receivables using the interest method …
a. Using the criteria for revenue recognition, justify Deere’s timing of revenue recognition for its equipment sales. Consider why recognition of revenue earlier or later than the time of shipment to dealers would not be more appropriate.
b. Describe briefly how the balance sheet accounts of Deere & Company listed here would change if it recognized revenues during the period of production using the percentageof-completion method. You do not need to give amounts, but indicate the likely direction of the change and describe the computation of its amount.
• Accounts and Notes Receivable
• Inventories • Retained Earnings
c. Respond to Requirement b assuming that Deere & Company recognized revenue using the installment method.
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