This is a new industry with a new problem for me: The ranch sold a breeding bull to a customer. Customer took possession of the animal. We booked a Sale/Accounts Receivable plus COGS/Inventory transaction. Subsequently the bull stopped breeding (I guess the customer has ugly cows). The ranch owner issued a credit for the sale price but the customer still owns the bull. What are my transactions? Do I still recognize the revenue but write off the receivable? Do I expense the write off as bad debt expense? Thank you
Accounting for non-performing cattle
Answers
1. I do not think it is "bad debt expense" as it is not bad debts.
2. I think it is a loss (as the other side of the reduction in AR). Extraordinary if this is a one off.
3. What was the other side of the entry used in the credit memo? There should have been one.
4. To make the transactions clearer/transparent, the sale should not be reversed
Sounds like a Sales Return/Allowance/Discount. The credit entry would be to A/R.
If the ranch owner credits it, the whole journal entry would be reversed, but only if the bull comes back.
Dt Revenues (P&L) Cr A/R
Dt Inventory Cr COGS (P&L)
If he doesn't, you cannot raise your inventory with the credit note so my suggestion would be:
Dt Revenues (P&L) Cr A/R
Dt Inventory Cr COGS (P&L)
+
Dt Negative Stock mutation (-) (P&L) Cr Inventory
Hence A/R is brought to null, as are the revenues (P&L) - no outstanding debt issues.
I hope this helps.
P.S. Years ago I had some sheep on the balance sheet of a related company.
Write it off as obsolete inventory.
Like most accounting transactions, the answer is that "it depends."
Was there a warranty provided with the bull or was the bull sold "as-is"? If there is a warranty then this could be a return even though the customer kept the bull. If there wasn't a warranty then things can become a bit more murky.
In summary your first transaction was.
Dr. AR
CR. Sales
When you did this I"m assuming that you also did this.
Dr. COGS
Cr. Inventory (or some asset account.)
And now the question is what happens?
Should you do the following.
Dr. Sales
Cr. AR to wipe it off
Or
Dr. Bad Debt Expense (or Allowance for Doubtful Accounts)
Cr. AR
You need to speak to Management/Operations to figure this part out. Were there any guarantees or did we just let the customer slide on this one? Once you know that, you'll know which entry to process.
I can't help myself, but did anyone sit down with the bull and ask if it felt stress? The pressure to perform could be the reason for his troubles.
Maybe the bull wasn't attracted to the cow?
Sorry... this scenario is just too funny....
BTW, I had a long-term client that was a ThoroughBred Horse Farm and I have watched multiple mares bred as well as helped some mares foal.. That's why I guess they used "teaser ponies" before the mating....