The Slattery Company was formed on January 1, 2007 to build a single product. The company issued no-par common stock on that date for $300,000 cash. The product costs $20 to make, all of which is paid in cash at the time of production. The company sells each unit of the product for $35 on credit and incurs sales commissions per unit of $5 cash. In 2007 the company produced 10,000 units, shipped 9,000 units, and received payment for 8,000 units.
1. Prepare the 2007 income statement and ending balance sheet under each of the following methods:
a. Revenue recognition at the time of sale (shipment)
b. Revenue recognition during production
c. Revenue recognition at the time of cash receipt
2. Which method provides the most useful information to users? Under what circumstances would the other methods provide more useful information?
3. In 2008 the company produced 15,000 units, shipped 16,000 units, and received payment for 17,000 units. What conclusion can you make about the balance in Retained Earnings on December 31, 2008 for each method of revenue recognition?
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