Case Study 2-1

370 Words2 Pages
1127 Case Study 2-1 According to FASB Accounting Standard Codification 605-50-45 Cash consideration given by a vendor to a customer is considered to be a reduction of the selling prices, therefore, shall be recorded as a reduction of revenue in the vendor’s income statement. It should be represented as a cost incurred to the extent that both of the following are met: * ”The vendor receives, or will receive, an identifiable benefit in exchange for the consideration. In order to meet this condition, the identified benefit must be sufficiently separable from the recipient’s purchase of the vendor’s products such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products or services in order to receive that benefit.” * “The vendor can reasonably estimate the fair value of the benefit identified under the preceding condition. If the amount of consideration paid by the vendor exceeds the estimated fair value of the benefit received, that excess amount shall be characterized as a reduction of revenue when recognized in the vendor’s income statement.” In Case study 2-1 Rainbow should recognize the sales incentive on the income statement as a reduction of sales because there is no sufficiently separable benefit to the entity. According to paragraph 605-50-25 certain sales incentives entitle a customer to receive a reduction in the price of a product or service of a specified amount of a prior purchase price charged to the customer at the point of sale. A vendor shall recognize a liability for those sales incentives at the later of the date at which the associated revenue is recognized by the vendor or the date at which the sales incentive is offered based on the estimated amount of refunds or rebates that will be claimed by customers.
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