Reference no: EM132553851

Question 1: Discuss the accounting issues in the transaction below?

Prior to the current year, JJI concentrated juices were produced solely for use in the juice bars. These juices are the base ingredients for JJI's smoothies, which are trademarked as Smoothtreats. In June of 2019, JJI decided to utilize the excess capacity in its manufacturing plant by selling its concentrated juices to a North American chain of family restaurants. The restaurant chain, The Tasty Spoon, signed an agreement that granted it exclusive rights to some of the Smoothtreats recipes for purposes of providing these drinks in its restaurants.

The terms of this supply agreement are as follows:

• JJI made five of its Smoothtreats recipes available to The Tasty Spoon. The Tasty Spoon is only permitted to use these recipes in the making of Smoothtreats using JJI concentrated juice. This is so that JJI can control the quality of the inputs because all smoothies are sold under its name. As well, this provision prevents The Tasty Spoon from taking the recipes and making its own smoothies. JJI's legal counsel spent a lot of time on this clause to ensure that the recipes could only be used in the manner intended by JJI.
• Upon delivery of the Smoothtreats recipes, The Tasty Spoon paid an up-front nonrefundable fee of $250,000 which JJI recorded as revenue.
• The Tasty Spoon restaurants order JJI concentrated juices directly from JJI's manufacturing plant. The first shipments were delivered in late August. The Tasty Spoon negotiated a general right of return because it was uncertain as to how much product it would be able to sell. From date of shipment, The Tasty Spoon has three months to return the product. Payments are to be made on the 10th of each month for the juice used in the previous month. On the 10th of the month, The Tasty Spoon restaurants notify JJI as to juice used and payment becomes due.
• The initial agreement covers the period from September 1, 2019, to August 31, 2022. Upon expiry of the initial agreement, it can be renewed for an additional five years upon agreement by both parties.