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Upon acceptance, the goods were manufactured by Aiken at a cost of $18,000. Both Aiken and Benton consider the acceptance of the goods on August 30 a formality given that Benton has purchased the same goods from Aiken numerous times without incident. On August 30, 2019, Aiken delivers the goods and Benton transfers cash to Aiken.

1. Does an enforceable contract exist between Aiken and Benton on August 1, 2019?
2. Prepare the journal entries in August 2019 necessary to account for this transaction. Assume Aiken uses a perpetual inventory system.
3. Next Level: Assume that the contract is non-cancelable. Would this condition allow Aiken to recognize revenue on August 1, 2019?

Answers:
1. Does an enforceable contract exist between Aiken and Benton on August 1, 2019?
2. Prepare the journal entries to record the sale on August 30. Aiken uses a perpetual inventory system.

Answer :

Final answer:

An enforceable contract may exist between Aiken and Benton on August 1, 2019, based on the given information. Assuming Aiken uses a perpetual inventory system, the journal entries in August 2019 necessary to account for this transaction would be to debit Accounts Receivable (or Cash) and credit Sales Revenue for the amount of cash received from Benton, and to debit Cost of Goods Sold and credit Inventory for the cost of the goods manufactured by Aiken. If the contract is noncancelable and all other revenue recognition criteria are met, Aiken would be able to recognize revenue on August 30, 2019.

Explanation:

1. Does an enforceable contract exist between Aiken and Benton on August 1, 2019?

Based on the given information, an enforceable contract may exist between Aiken and Benton on August 1, 2019. Both parties consider the acceptance of the goods on August 30 a formality, indicating a previous course of dealing. This suggests that there may be an existing contract between them. However, further evidence and analysis would be required to definitively determine the existence of a contract.

2. Prepare the journal entries in August 2019 necessary to account for this transaction. Assume Aiken uses a perpetual inventory system.

Assuming Aiken uses a perpetual inventory system, the following journal entries would be necessary to account for the transaction:

  1. Debit Accounts Receivable (or Cash) and credit Sales Revenue for the amount of cash received from Benton.
  2. Debit Cost of Goods Sold and credit Inventory for the cost of the goods manufactured by Aiken.

3. Assuming the contract is noncancelable, would this condition allow Aiken to recognize revenue on August 30, 2019?

If the contract is noncancelable and all other revenue recognition criteria are met, Aiken would be able to recognize revenue on August 30, 2019. Revenue recognition generally occurs when it is earned and realized or realizable. However, specific conditions must be met, such as the transfer of goods or services to the customer and the determination of the transaction price. As long as these conditions are satisfied, Aiken can recognize revenue on the specified date.

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