Question1(c) On 1 July 2019, XYZ Ltd received $100,000 in cash from customer ABC for an order of 100,000 units of its product. By the end of the financial year (assume the financial year starts on 1 July 2019 and ends on 30 June 2020), XYZ Ltd had delivered 35,000 units of product to ABC (selling price per unit is $1). The rest of the cash received in in advance from ABC relates to goods that will be provided in the next financial year. XYZ sets its selling price by employing a 100% mark up on the cost of inventory.Which of the following statements is true for transactions between XYZ and ABC for the financial year ended 30 June 2020? XYZ’s COGS was $35,000 XYZ’s inventory decreased by $35,000 The closing balance of unearned revenue relating to ABC was $35,000 XYZ generated sales revenue of $65,000 from ABC XYZ’s COGS was $17,500 ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

We start by outlining the facts given and applying standard accounting treatment for revenue recognition and cost of goods sold in a two-stage delivery scenario.

- The company received 100,000 cash in advance for 100,000 units sold at a selling price of 1 per unit. With a 100% markup on cost, the cost per unit must be 0.50 (since selling price = 2 × cost).
- By 30 June 2020, 35,000 units have been delivered. Therefore, revenue recognized for the year from ABC is 35,000 × 1 = 35,000.
- Cost of goods sold (COGS) for the 35,000 units is 35,000 × 0.50 = 17,500.
- The remaining unperformed portion relates to goods to be provided in the next financial year, so the corresponding revenue is not yet recognized and the unearned revenue balance remains for that portion. The cash received for those future units remains a liability (unearned revenue) until performance occurs.
- The closing unearned revenue balance therefore equals the portion of the original 100,000 that has not yet been earned, which is 100,000 − 35,000 = 65,000.
- Inventory changes reflect the cost of the goods sold: since 17,500 of cost has been recognized as COGS, the inventory should have decreased by 17,500, not by 35,000.

Now evaluate each option against these calculations:

Option 1: XYZ’s COGS was $35,000
- This is incorrect because COGS is based on the cost per unit (0.50) times 35,000 units, giving 17,500, not 35,000. The 35,000 figure would imply a cost per unit of 1.00, which contradicts the 100% markup on cost given the selling price of 1.

Option 2: XYZ’s inventory decreased by $35,000
- The decrease in inventory should equal COGS, which is 17,500. Therefore a 35,000 decrease is inconsistent with the numbers provided; the correct inventory decrease should be 17,500.

Option 3: The closing balance of unearned revenue relating to ABC was $35,000
- The unearned revenue balance represents amounts received for goods not yet delivered. Since 35,000 units have been delivered (and earned revenue of 35,000 has been recognized), the remaining unearned revenue should be 100,000 − 35,000 = 65,000, not 35,000.

Option 4: XYZ generated sales revenue of $65,000 from ABC
- Revenue recognized for the year based on delivered units is 35,000, not 65,000. The 65,000 figure would imply 65,000 units sold or a selling price inconsistent with the stated 1 per unit, so this is incorrect.

Option 5: XYZ’s COGS was $17,500
- This aligns with the cost per unit (0.50) times the 35,000 units delivered, giving 17,500. It is consistent with the 100% markup on cost and the 1 per unit selling price.

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