\"Taking a Long Shot...\" To supplement donations collected from its general com

Question

"Taking a Long Shot..." To supplement donations collected from its general community solicitation, Tri-Cities United Charities holds an annual lottery sweepstakes. In this year's sweepstakes, United Charities is offering a grand prize of $1,000,000 to a single winning ticket holder. A total of 10,000 tickets have been printed, and United Charities plans to sell all the tickets at a price of $150 each Since its inception, the sweepstakes has attracted area-wide interest, and United Charities has always been able to meet its sales target. However, in the unlikely event that it might fail to sell a sufficient number of tickets to

Explanation / Answer

.1.a.

If a fairly active secondary market exists:

The ticket has got a market value for the short term. It can be exchanged for cash.

.Hence Phil N Tropic should recognize his lottery ticket in his financial statement.

.1.b.

If a fairly active secondary market does not exist:

The ticket has no value except   probability of winning the lottery. The probability of winning the lottery is (1/10000) which is negligible. Refund of price of ticket is unlikely.

.Hence Phil N Tropic should not recognize his lottery ticket in his financial statement.

.2a. If a fairly active secondary market exists:

The ticket has got a market value for the short term for an amount of $90 (under Cost or market price whichever is lower principle) It can be exchanged for cash.

.Hence Phil N Tropic should report his lottery ticket in his financial statement at a $90

.2.b.

If a fairly active secondary market does not exist:

.Hence Phil N Tropic should not recognize his lottery ticket in his financial statement. Hence amount of asset should be NIL

JOURNAL ENTRIES:

IF FAIRLY ACTIVE SECONDARY MARKET EXISTS:

Account

Debit

Credit

Loterry ticket

$90

lotery expense

$60

Cash

$150

IF FAIRLY ACTIVE SECONDARY MARKET DOES NOT EXIST:

Account

Debit

Credit

lotery expenses

$150

Cash

$150

Account

Debit

Credit

Loterry ticket

$90

lotery expense

$60

Cash

$150

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