Detecting Accounting Fraud 1st Edition by Cecil Jackson

Exercise 6

Aerial, Inc., an airplane manufacturing company, incurred $1 million in development costs during the design and manufacture of a new airplane. Aerial estimates no further development costs, and it estimates that it will need to sell 100 airplanes to break even on this line of aircraft. It believes it will easily sell this number of planes and adopts the policy of writing off the development costs over the sale of the 100 planes that it estimates it will be required to sell in order to break even. Its policy is to add this development cost to the cost of goods sold as each airplane is sold.
If the company sells ten airplanes in the following year and the cost of goods sold is $2 million per airplane excluding development costs, how much must the company recognize as its total cost of goods sold for the year?