How will the reservation, purchase agreement, and the deliveryof a Model 3 impact Tesla’s financial statements?
Since 2016, Tesla has been accepting reservations for its Model3 car, which is a mid-size all electric four-door sedan. Thelong-range battery Model 3 (310 miles on a single charge) starts at$50,000, while the standard range battery Model 3 (220 miles)starts at $35,000. Production cannot keep up with demand for thismodel. Tesla produced and delivered 1,772 units during 2017. Teslahas said it plans to produce 5,000 units per week in the latterhalf of 2018. Currently there are more than 400,000 reservationsfor the Model 3, with 1,800 reservations being added per day. If acustomer wants to purchase a Tesla Model 3, the customer will firstmake a reservation for a Model 3 which puts the customer in line. Areservation requires a $1,000 reservation payment. When theproduction of that customer’s Tesla would be scheduled within thenext 1 – 3 months, Tesla invites the customer to place an actualorder. The $1,000 reservation payment is applied to the customer’spurchase agreement. If the customer changes their mind at any pointbefore making the purchase agreement, the $1,000 reservationpayment is refundable to the customer. Full payment for the Model 3(less the $1,000 reservation payment) is collected at the time ofdelivery to the customer.
Questions:
1. When Tesla receives a $1,000 reservation payment from acustomer, what Tesla general ledger accounts does this $1,000impact? Explain.
2. Now assume that a customer orders a Model 3 by completing thepurchase agreement. Will this purchase agreement directly impactTesla’s balance sheet or income statement at the date of thepurchase agreement?
3. When the Model 3 is delivered to the customer and payment isreceived, how will Tesla’s balance sheet and income statement beimpacted at the point of delivery?
