2 Tyre, a public limited company, operates in the vehicle retailing sector. The company is currently preparing its financial
statements for the year ended 31 May 2006 and has asked for advice on how to deal with the following items:
(i) Tyre requires customers to pay a deposit of 20% of the purchase price when placing an order for a vehicle. If the
customer cancels the order, the deposit is not refundable and Tyre retains it. If the order cannot be fulfilled by
Tyre, the company repays the full amount of the deposit to the customer. The balance of the purchase price
becomes payable on the delivery of the vehicle when the title to the goods passes. Tyre proposes to recognise
the revenue from the deposits immediately and the balance of the purchase price when the goods are delivered
to the customer. The cost of sales for the vehicle is recognised when the balance of the purchase price is paid.
Additionally, Tyre had sold a fleet of cars to Hub and gave Hub a discount of 30% of the retail price on the
transaction. The discount given is normal for this type of transaction. Tyre has given Hub a buyback option which
entitles Hub to require Tyre to repurchase the vehicles after three years for 40% of the purchase price. The normal
economic life of the vehicles is five years and the buyback option is expected to be exercised. (8 marks)
Required:
Advise the directors of Tyre on how to treat the above items in the financial statements for the year ended
31 May 2006.
(The mark allocation is shown against each of the above items)