Hogan Farms produced 1,600,000 pounds of cotton during the 2015 season. Hogan sells all of its cotton to Ott Co., which has agreed to purchase Hogan's entire production at the prevailing market price. Recent legislation assures that the market price will not fall below $.70 per pound during the next two years. Hogan's costs of selling and distributing the cotton are immaterial and can be reasonably estimated. Hogan reports its inventory at expected exit value. During 2015, Hogan sold and delivered to Ott 1,200,000 pounds at the market price of $.70. Hogan sold the remaining 400,000 pounds during 2016 at the market price of $.72. What amount of revenue should Hogan recognize in 2015?

Question

Quizplus · Accepted Answer

Hogan should recognize revenue for all the cotton produced and sold/delivered in 2015, which is 1,200,000 pounds at $.70 per pound, totaling $840,000. Additionally, since the remaining 400,000 pounds are assured to be sold at a price not less than $.70 due to the legislation and the agreement with Ott Co., and since Hogan reports its inventory at expected exit value which can be reasonably estimated, the revenue for these 400,000 pounds should also be recognized in 2015 at the minimum assured price of $.70 per pound, adding another $280,000. Therefore, the total revenue recognized in 2015 is $840,000 + $280,000 = $1,120,000.

Hogan Farms Produced 1,600,000 Pounds of Cotton During the 2015