Question 1: Describe the key aspects of Manufactured Homes’ business. Does the company have a viable business?
Manufactured Homes sells affordable fully furnished and carpeted mobile homes in the southeast of the United States of America. These Potential customers for Manufactured Homes include individuals seeking a single-family primary residence but lacking the ability to purchase conventional housing, retirees, and those wanting a second home for vacation purposes. The company targets individuals in the low-income category, which is a segment of the manufactured homes market in the company’s seven state area. The company’s customers are typically between the ages of 18 and 40, blue-collar workers in manufacturing, service and agricultural industries, and earned approximately $20,000 per year. The company believes that its focus on the lower end of the market has two advantages. First, since its customers are seeking to fulfil an essential housing need, sales are less affected by changes in general economic conditions. Second, the company’s repossession rates are significantly lower than those of the industry since its customers are likely to work very hard to keep their primary residences even when times are bad. •
Most of Manufactured Homes’ sales are credit sales where the customer pays a down payment and enters into an installment sales contract with the company to pay the remaining amount over periods ranging from 84 to 180 months. Manufactured Homes sells the majority of this contracts to financial institutions. •
The manufactured homes industry is fragmented. There are approximately 10,000 manufactured home retailers throughout the nation, most of which fall into the category of ‘’mom and pop’’ operations. The industry is undergoing a period of transition and consolidation. More and more of the smaller firms, lacking volume buying power and adequate capitalization, are disappearing of becoming a part of a larger company. The industry has always been competitive bus has become more so in recent years. The continuing increases in the average price of conventional housing have forced low-income families to seek other alternatives. And more and more are turning to manufactured homes. •
I believe that the company has a viable business for several reasons. First, because the company focuses on the lower end of the market, and as stated above, this segment is seeking alternatives for conventional housing. Second, because larger companies like Manufactured homes have the financial advantages of volume buying, and that is why independent dealers are actively seeking a working relationship with Manufactured Homes. Third, because Manufactured Homes’ revenues increases rapidly in recent years, from $11 million in 1983 to $120 million in 1986.
Question 2: Describe and show the journal entries illustrating how the company accounts for its home sales. Is this accounting treatment reasonable? What are the key assumptions made under this approach? Do you agree with these assumptions?
Most of Manufactured Homes’ sales are credit sales where the customer pays a down payment (of 5 to 10 percent of the sales price) and enters into an installment sales contract with the company to pay the remaining amount over periods ranging from 84 to 180 months. •
The journal entries are:
Dr. Accounts receivable
Cr. Net sales
Dr. Cost of sales
A sale is recognized when payment is received or, in the case of credit sales, when a down payment (generally 10% of the sales price) is received and the company and the customer enter into an installment contract. Installment contracts are normally payable over periods ranging from 120 to 180 months. •
I believe this is aggressive type of revenue recognition, because all revenue from the sales is recognized when a customer enters into an installment contract with the company. Therefore I don’t believe this accounting treatment is reasonable. In this case...
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