Communication Case 5–7
The critical question that student groups should address is how to account for
The preferred solution should include the idea that the sale of an ice cream cone
to a person who has a card involves two performance obligations:
Students should recognize that each punch on the punch card contributes to an
option to receive a future ice cream cone. That option is capable of being distinct
the punch card is distinct from the cone that is sold at the same time, and each
punch qualifies as a performance obligation.
Students also should recognize that not all cards will be redeemed for ice
average leads to Jerry providing 1/20 of a free future cone. In that case, the
of a cone as follows:
Cash xxx
Sales Revenue xxx
Case 5–7 (concluded)
In the future, when a card is redeemed, the deferred revenue account would be
reduced and revenue recognized for deferred revenue related to ten punches.
for in the same manner as they were previously.
Other solutions that are likely to emerge:
1. Treat providing the occasional free cone as a cost of doing business and
additional information to financial statement users. This approach would
be an immaterial departure from GAAP.
2. Ignore revenue recognition and instead accrue an estimated cost. This
the liability and inventory are reduced. This approach ignores the idea that
there is a revenue-recognition aspect to the promise of free cones, so is not
correct.
It’s important that each student actively participate in the process. Domination by
one or two individuals should be discouraged. Students should be encouraged to
Judgment Case 5-8
When other parties are involved in providing goods or services to a seller’s
customer, the seller must determine whether its performance obligation is to
the amount of any fee or commission received in exchange for arranging for the
other party to provide the goods or services (if agent).
Requirement 1
AuctionCo is a principal because it obtained control of the used bicycle before
Requirement 2
AuctionCo is an agent because it never controlled the product before it was
$100 received upon sending $200 to the original owner.
Requirement 3
If AuctionCo must pay the bicycle owner the $200 price regardless of whether
and should be treated as a principal.
Real World Case 5–9
Requirement 2
Excerpt from Expedia’s 2015 Annual Report:
Merchant Hotel. Our travelers pay us for merchant hotel transactions prior to
departing on their trip, generally when they book the reservation. We record the
presented net of amounts paid to suppliers.
Case 5–9 (continued)
Excerpt from Priceline Group’s 2015 Annual Report:
The Name Your Own Price ® service connects consumers that are willing to
accept a level of flexibility regarding their travel itinerary with travel service
offer. The Company selects the travel service provider and determines the price it
will accept from the consumer. Merchant revenues and cost of revenues include the
selling price and cost, respectively, of the Name Your Own Price ® travel services
and are reported on a gross basis.
Merchant revenues for the Company’s merchant retail services are derived
amounts are generally refundable upon cancellation, subject to cancellation
penalties in certain cases. Merchant revenues and accounts payable to the travel
service provider are recognized at the conclusion of the consumer’s stay at the
merchant revenue.
Agency revenues are derived from travel-related transactions where the
Company is not the merchant of record and where the prices of the travel services
are generally recognized by the Company when the consumers complete their
travel.
Case 5–9 (continued)
Requirement 3
a) Expedia’s “merchant hotel” revenues:
b) Priceline’s “‘Name Your Own Price®’ services”:
This is reported gross: “Merchant revenues and cost of merchant revenues
c) Priceline’s “merchant retail services”:
This is reported net: “The Company records the difference between the
merchant revenue.”
d) Priceline’s agency revenues:
Case 5–9 (concluded)
Requirement 4
Students might argue this point both ways, as Priceline’s “Name your own
Price®” service has characteristics that differ from Expedia’s merchant hotel model.
would recognize revenue gross and Expedia would recognize revenue net. If
similar items are treated differently, comparability is reduced.
Research Case 5–10
Requirement 1
FASB ASC 606–10–55–36: “Revenue from Contracts with
Requirement 2
FASB ASC 606–10–55–39: “Revenue from Contracts with
1. The entity is primarily responsible for fulfilling the contract.
Requirements 3 and 4
For their AdSense program, Google’s 2013 10K states: “We recognize as
revenues the fees charged to advertisers each time a user clicks on one of the ads
report our Google AdSense revenues on a gross basis principally because we are
the primary obligor to our advertisers.” That is consistent with the first indicator
listed above, so Google’s reasoning appears appropriate.
Real World Case 5–11
Requirement 1
A bill and hold strategy accelerates the recognition of revenue. In this case,
Requirement 2
A customer would probably not be expected to pay for goods purchased using
Requirement 3
Sales that would normally have been recorded in 1998 were recorded in 1997.
to 1997.
Requirement 4
Earnings quality refers to the ability of reported earnings (income) to predict a
1997 earnings figure that was not indicative of the company’s future
profit-generating ability.
Judgment Case 5–12
Bill’s argument is that recognizing revenue upon project completion is
and that revenue should be recognized as the process takes place.
John’s argument is correct. In situations when the earnings process takes place
completed.
Communication Case 5–13
Suggested Grading Concepts and Grading Scheme:
Content (70%)
_________ 25 Income differences.
Revenue recognition over time recognizes gross profit during
anticipated.
_________ 20 Balance sheet differences.
The two approaches are similar. However, for profitable projects, the
gross profit.
__________ 25 According to generally accepted accounting principles, revenue should be
recognized over time if:
the seller can receive payment for its progress even if the customer cancels
the contract.
over time.
_________
70 points
Writing (30%)
_________ 6 Terminology and tone appropriate to the audience of a company
_________ 12 English
Sentences grammatically clear and well organized, concise.
_________
30 points_