17.6.2: Sales Method: Byproducts Recognized at Time of Sale

Sales Method: Byproducts Recognized at Time of Sale

With this method, no journal entries are made for byproducts until they are sold. At that time, byproduct revenues are reported in the income statement as either other income or a deduction from cost of goods sold. In the Westlake Corporation example, byproduct revenues in July 2020 are $$ 1,200 (1,200 cubic feet \times $1 per cubic foot)$ based on sales of 1,200 cubic feet of wood chips of the 4,000 cubic feet produced. The journal entries are as follows:

<p>A table shows journal entries that illustrate the Byproducts Recognized at Time of Sale sales method</p>

The table depicts journal entries that illustrate the Byproducts Recognized at Time of Sale sales method. The details of the table are as follows:

1. is same as for the production method.

Work in Process: 150,000
Accounts Payable: 150,000

2. is same as for the production method.

Work in Process: 100,000
Various accounts such as Wages Payable and Accumulated Depreciation: 100,000

3. Finished Goods, Fine-Grade Lumber: 250,000 dollars

Work in Process: 250,000 dollars
To record the cost of the main product completed during July.

4a. Cost of Goods Sold, the quantity 40,000 board feet divided by 50,000 board feet times 250,000 dollars: 200,000 dollars

Finished Goods, Fine-Grade Lumber, 200,000 dollars
To record the cost of the main product sold during July.

4b. Same as for the production method

Cash or Accounts Receivable, 40,000 board feet times 6 dollars per board foot: 240,000 dollars
Revenues, Fine-Grade Lumber: 240,000 dollars

5. Cash or Accounts Receivable: 1,200

Revenues, Wood Chips: 1,200
To record the sales of the byproduct during July.

Which method should a company use? The production method for accounting for byproducts is consistent with the matching principle and is preferred. The method recognizes byproduct inventory in the accounting period in which it is produced and simultaneously reduces the cost of manufacturing the main or joint products, thereby better matching revenues and expenses from selling the main product. The sales method is simpler and is often used in practice, because the dollar amounts of byproducts are immaterial. The drawback of the sales method is that it allows a firm to “manage” its reported earnings by timing the sale of byproducts. For example, a firm might store byproducts for several periods and sell them when revenues and profits from the main product or joint products are low.

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