Free of charge goods (FOC) to customers

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Hi,

Sometimes we want to sell to customers like this: for every 5 unit purchase, customers got 1 free. Let assume selling price is $10 per unit, and cost is $5.

An accountant wants to do accounting treatment like below:

Dr. Cash: $50
Cr. Sales Revenue: $50 (5 units x $10)

Dr. Deduction from Sales Revenue $5 (cost of 1 unit free)
Dr. Cost of good sold: $25 (5 units x $5)
Cr. Inventory: $30

I do not quite understand why the free unit is valued at cost in the deduction account. Please tell me if it is in accordance with IAS?.

Thanks
 

Triest123

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Hi,

Sometimes we want to sell to customers like this: for every 5 unit purchase, customers got 1 free. Let assume selling price is $10 per unit, and cost is $5.

An accountant wants to do accounting treatment like below:

Dr. Cash: $50
Cr. Sales Revenue: $50 (5 units x $10)

Dr. Deduction from Sales Revenue $5 (cost of 1 unit free)
Dr. Cost of good sold: $25 (5 units x $5)
Cr. Inventory: $30

I do not quite understand why the free unit is valued at cost in the deduction account. Please tell me if it is in accordance with IAS?.

Thanks
=> The situation is just like you give a trade discount of about 17% for selling
6 units to your customer

Sales Revenue $10 x 6 units x 83% = $50
 
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Yes, but the issue is deduction amount. The accountant wants to book the discount is $5, instead $10, as you can see above accounting treatmen.
 

Triest123

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Yes, but the issue is deduction amount. The accountant wants to book the discount is $5, instead $10, as you can see above accounting treatmen.
=> The "stock-in" & "stock-out" on the inventory report are all based on costs,
otherwise, you can't comput the closing stock value precisely.
i
 
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Answer:

Because we are writing inventory at cost not on selling price, that is why we write one extra unit at cost.i-e $5.

Hope answered.
 

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