Kitchen Aid (KA) manufactures cordless mixers for use in the kitchens of consumers. KA sells to retailers,
who sell the mixers to the ultimate consumer. One of KA’s retail customers is Jones Kitchenware (JK). On
January 1, KA sells to and receives payment from JK for 100 cordless mixers with a one-year warranty for
$50 each. The mixers are delivered by KA to JK upon receipt of payment and the warranty is initiated at
that time. This warranty provides for a replacement of the mixer if the mixer fails to work properly. KA
also sells its mixers with no warranty for $40 per unit. The cost to manufacture each mixer is $32.
KA also provides its retail customers with sales incentives in the form of volume discounts on purchases
of mixers with warranties paid at the end of an annual period. The agreement between KA and JK
provides for the following volume discounts. Additionally, the probability of purchases for each volume
level as estimated by KA is provided based on historical experience and forecasted sales.
Number of mixers purchased Discount Probability
Less than 1,000 0.00% 35.00%
1,000 through 1,999 3.75% 40.00%
2,000 or more 10.00% 25.00%
The discounts are retroactive. If 2,000 mixers are purchased during the year, a discount of 10% will be
applied to all 2,000 mixers.
► Prepare a memo (approximately 2 pages) detailing your proposed accounting treatment, including
references to the ASC with in-text citations. Go through each of the 5 steps for revenue recognition and
provide detailed discussions. Specifically, is there a valid contract? How many performance obligations
are there? How does the seller determine the transaction price? If necessary, how do we allocate the
transaction price? Lastly, when does the seller recognize revenue? Attached to the memo, record all
initial accounting entries for KA for the month of January. Include all calculations to support your work.
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