AP4-7A (Revenue recognition and statement of income) Kabili Bites Ltd. operates
ID: 2342859 • Letter: A
Question
AP4-7A (Revenue recognition and statement of income) Kabili Bites Ltd. operates a chain of restaurants across Canada. Most of the company's business is from customers who enjoy in-restaurant lunches and dinners and pay before they leave. The company also provides catered food for functions outside of the restaurant. Catering customers are required to pay a 40% deposit at the time of booking the event. The remaining 60% is due on the day of the function. During 2020, the restaurant chain collected $7,036,000 from restaurant and catered sales. At ye end, December 31, 2020, the catered sales amount included $121,000 for a convention scheduled for January 12, 2021. Kabili Bites Ltd. paid S3,298,000 for food supplies during the year and $1,248,000 for wages for the chefs and other restaurant staff. The restaurant owed $62,000 in wages to its staff at year end, which will be paid on January 4, 2021, as part of the normal weekly pay schedule. Required a. Prepare as much of the multi-step statement of income for Kabili Bites Ltd. as you can, showing the amount of sales and any other amounts that should be included. Show all calculations. b. Using the five-step revenue recognition method, explain when Kabili Bites can recognize revenues from its various revenue streams. c. Did Kabili Bites have a cost of goods sold? Why or why not? d. What other expenses do you think the company probably has?Explanation / Answer
Kabili Bites LTD.
Multi step income statement for year ended 31 Dec 2020
Revenue* 6963400
(-)cost of goods sold . 3298000
Gross Profit . 3665400
Operating expenses
Salaries & wages** . 1310000
Operating Profit . 2355400
Other non operating income . -
Net profit . 2355400
B) As per five step revenue recognition method, revenue should be recognized as per following steps.
1) Identify the contract with the customer => In this case we have a contract for a convention scheduled on 12 jan.
2) Identify the performance obligation in the contract => company still have obligation for the schedule to be fulfilled.
3) Determine the transaction price => Here we have transaction price to be 121000.
4) Allocate the transaction price to the performance obligations in the contract=> Here 40% of transaction is to be paid on booking itself and 60% payable on performance of contract
5) Recognize revenue as and when company satisfies performance obligation.
Thus presently company has two main sources of revenue
1) In restaurant lunches and dinner => Revenue from this source by the organization can be recognised as and when customer eats out food and pays the AMT. for it.
2) catering service => in this case entire revenue will be recognised when company provides the catering serviceor fulfill its obligation. Accordingly. in the present case Co. Can recognize 40% on booking itself as 60% as and when it's end up providing catering.
C) yes, kabili bites did have cost of goods sold. In general for food and beverage industry, term cost of goods sold includes amount of money customer spends on supplies and food ingredients such as beverages, meets, fruits and vegetables used to prepare menu items.
Accordingly, in the present case COGS for kabili is $3298000.
D) other expenses that the company may probably have are
a. Marketing expenses => This includes expenses on entertainment, coupens, vouchers, menu etc.
b .occupancy expenses => These exp. are related to restaurants physical building like property tax, rates, insurance etc.
c .Repairs & maintenance => This includes repairs of building itself, dining area etc.
d. Administration exp. => These expenses includes exp. on office supplies, telephone charges, postage etc.