Introduction:
TechCo, a company that manufactures electronic gadgets, needed to send a batch of their new smartwatches to their main distributor. To do this, they hired a shipping company to manage the outbound shipment.
The Situation:
TechCo arranged for the shipment of 1,000 smartwatches to their distributor. The cost of shipping these smartwatches was $3 per unit, making the total shipment cost $3,000. TechCo decided to make a partial payment upfront and pay the remaining balance upon receiving the shipment service.
Case Facts:
Total cost of the shipment: $3,000
Amount paid upfront (in advance): $1,000
Amount paid upon delivery: $2,000
Number of units shipped: 1,000
Cost per unit for shipment: $3
Total cost of shipment: $3,000
Payment method:
Upfront payment: $1,000
Payment upon delivery: $2,000
Question for You:
Now, let’s think about how TechCo would record this transaction in their accounting books according to IFRS (International Financial Reporting Standards). TechCo needs to make the following journal entries:
When the upfront payment is made:
Debit: Prepaid Expense for the amount paid upfront.
Credit: Cash/Bank for the amount paid.
When the shipment service is received and the remaining payment is made:
Debit: Outbound Shipment Expense for the total cost of the shipment.
Credit: Prepaid Expense for the amount already paid upfront.
Credit: Cash/Bank for the remaining amount paid.
Can You Figure Out the IFRS Journal Entries?
Based on the information provided:
When TechCo makes the upfront payment:
Debit: Prepaid Expense for $1,000
Credit: Cash/Bank for $1,000
When the shipment service is received and the remaining payment is made:
Debit: Outbound Shipment Expense for $3,000
Credit: Prepaid Expense for $1,000
Credit: Cash/Bank for $2,000
This case study shows how businesses record payments for services in stages—paying a portion upfront and the rest upon completion. This approach ensures that services are received as needed while managing cash flow effectively.
Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.
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