In 2018, Fabulous Fruit expanded its operations in Georgia to include growing pe
ID: 2517653 • Letter: I
Question
In 2018, Fabulous Fruit expanded its operations in Georgia to include growing peaches for commercial canning companies. Land was prepared, irrigation systems installed and 3,000 “whips” (baby trees) were planted. It is expected that the trees will be ready for commercial production by 2021. At that time, Fabulous will begin selling the entire crop for canning. The trees will not produce a large enough crop for commercial canning before 2021. In 2019 and 2020, small quantities of fruit will be harvested and sold at local farmers’ markets. Fabulous wants to know how to properly account for those sales.
Explanation / Answer
The crop takes more than 1 year to get ready for commercial yield. When planted in 2018, it will get ready by 2021. Till the time, small quantities of crop will be sold.After 2021, the revenue from the crop will actually start. But as per accounting standards, it will be wrong to defer the recognition of income till 2021. It will lead to no income in initial years and high revenue in later years. But this is not correct as per prudency principle. In the earlier years also, the crop is getting ready for its commercial yield. It means some activity is going on.
So, in 2018, 2019 & 2020, revenue should be recognised to the extent of (Fair Value less costs to sell) and the revenue recognised should be carried forward as Assets/Inventory.
When actual sales are realised, it must be first reversed against carried forward balance of Inventory and balance if any must be recognised as Revenue of that year.