How will the reservation, purchase agreement, and the delivery of a Model 3 impact Tesla’s financial statements?

Tesla Model 3 Mid-size all-electric four-door sedan Long-range battery model goes 310 miles per charge; starts at $50,000 Standard-range battery model goes 220 miles per charge; starts at $35,000

Customer process for buying a Model 3 Make a reservation accompanied by a reservation payment of $1,000 1 Receives invitation to make a purchase agreement when production is within 1 – 3 months 2 Pays in full (less the $1,000 reservation payment) upon delivery of Model 3 3

Tesla’s backlog of reservations Tesla produced and delivered 1,772 units during 2017 Plans to produce 5,000 units per week, starting in the second half of 2018 Currently more than 400,000 outstanding reservations Receiving, on average, 1,800 reservations per day

Question 1 When Tesla receives a $1,000 reservation payment from a customer, what Tesla general ledger accounts does this $1,000 impact? Explain.

Question 2 Now assume that a customer orders a Model 3 by completing the purchase agreement. Will this purchase agreement directly impact Tesla’s balance sheet or income statement at the date of the purchase agreement?

Question 3 When the Model 3 is delivered to the customer and payment is received, how will Tesla’s balance sheet and income statement be impacted at the point of delivery?

Question Recap When Tesla receives a $1,000 reservation payment from a customer, what Tesla general ledger accounts does this $1,000 impact? Explain. Now assume that a customer orders a Model 3 by completing the purchase agreement. Will this purchase agreement directly impact Tesla’s balance sheet or income statement at the date of the purchase agreement? When the Model 3 is delivered to the customer and payment is received, how will Tesla’s balance sheet and income statement be impacted at the point of delivery?

Contact Dr. Wendy Tietz at wtietz@kent.edu For additional news stories to use in the accounting classroom, see the Accounting in the Headlines blog at http://accountingintheheadlines.com Questions or comments? Contact Dr. Wendy Tietz at wtietz@kent.edu