Accounting Chapter 5 Homework When other parties are involved in providing goods

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.

Sales of ice cream cones to people who do not have cards have only a single

performance obligation – to deliver the ice cream cone – and so can be accounted 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

don’t view provision of that cone as a separate performance obligation. The

2. Ignore revenue recognition and instead accrue an estimated cost. This

solution views the free ice cream cone as a promotional expense. The

estimated cost of the free cone should be expensed as the 10 required cones

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 provide

the goods or services, making the seller a principal, or the seller arranges for another

Requirement 1

Requirement 2

Requirement 3

Real World Case 5–9

Requirement 2

Excerpt from Orbitz’s 2013 Annual Report:

Under the merchant model, we generate revenue for our services based on the

difference between the total amount the customer pays for the travel product and the

negotiated net rate plus estimated taxes that the supplier charges us for that product.

Case 5–9 (continued)

Excerpt from Priceline.com’s 2013 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 providers that

are willing to accept a lower price in order to sell their excess capacity without

Merchant Retail Services: Merchant revenues for the Company’s merchant retail

services are derived from transactions where consumers book accommodation

reservations or rental car reservations from travel service providers at disclosed rates

which are subject to contractual arrangements. Charges are billed to consumers by

the Company at the time of booking and are included in deferred merchant bookings

by third parties. Agency revenues include travel commissions, global distribution

system (“GDS”) reservation booking fees and customer processing fees, and are

reported at the net amounts received, without any associated cost of revenue. Such

revenues are generally recognized by the Company when the customers complete

their travel.

Case 5–9 (continued)

Requirement 3

a) Orbitz’s “merchant model” revenues:

b) Orbitz’s “retail model” revenues:

c) Priceline.com’s “merchant revenues for ‘Name Your Own Price®’ services”:

d) Priceline.com’s “merchant retail services”:

e) Priceline.com’s agency revenues:

Intermediate Accounting, 8/e 5–165

Case 5–9 (concluded)

Requirement 4

Research Case 5–10

Requirement 1

FASB ASC 606–10–55–36: “Revenue from Contracts with Customers–

Overall–Implementation Guidance and Illustrations–Principal versus Agent

Considerations.”

Requirement 2

FASB ASC 606–10–55–39: “Revenue from Contracts with Customers–

Overall–Implementation Guidance and Illustrations–Principal versus Agent

Considerations.”

The Codification lists the following indicators for use of the gross method:

1. Another party 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 that

Intermediate Accounting, 8/e 5–167

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.

Requirement 4

Earnings quality refers to the ability of reported earnings (income) to predict a

Judgment Case 5–12

Bill’s argument is that recognizing revenue upon project completion is

preferable because it is analogous to point of delivery revenue recognition. That is,

Intermediate Accounting, 8/e 5–169

Communication Case 5–13

Suggested Grading Concepts and Grading Scheme:

Content (70%)

________ 25 Income differences.

⎯ Revenue recognition over time recognizes gross profit during construction

based on an estimate of percent complete.

⎯ If a project doesn’t qualify for revenue recognition over time, no gross

profit is recognized until project completion.

⎯ Estimated losses are fully recognized in the first period an overall loss is

anticipated.

________ 20 Balance sheet differences.

⎯ The two approaches are similar. However, for profitable projects, the

construction in progress account during construction will have a higher

balance when revenue is recognized over time due to the inclusion of gross

profit.

________ 25 According to generally accepted accounting principles, revenue should be

recognized over time if:

1. The customer consumes the benefit of the seller’s work as it is performed,

2. The customer controls the asset as it is created, or

3. The seller is creating an asset that has no alternative use to the seller, and the

seller can receive payment for its progress even if the customer cancels the

contract.

The second and third of these situations likely apply to Willingham’s construction

contracts, so those contracts probably require revenue recognition over time.

________

70 points

Writing (30%)

________ 6 Terminology and tone appropriate to the audience of a company

controller.

________ 12 Organization permits ease of understanding.

⎯ Introduction that states purpose.

⎯ Paragraphs that separate main points.

________ 12 English

⎯ Sentences grammatically clear and well organized, concise.

⎯ Word selection.

⎯ Spelling.

⎯ Grammar and punctuation.

________

30 points

Analysis Case 5–14

This case encourages students to obtain hands-on familiarity with an actual

annual report and library sources of industry data. They also must apply the

techniques learned in the chapter. You may wish to provide students with multiple

copies of the same annual reports and compare responses. Another approach is to

divide the class into teams who evaluate reports from a group perspective.

Judgment Case 5–15

Apparently, a significant increase in assets occurred during the last quarter.

Total assets were $324 million and now they total $450 million, as can be calculated

as follows:

Intermediate Accounting, 8/e 5–171

Integrating Case 5–16

Balance Sheet

Assets

Cash $ 15,000 given

Liabilities and Shareholders’ Equity

Accounts payable $ 25,000 (g)

Income Statement

Sales $300,000 (a)

Case 5–16 (concluded)

Calculations ($ in 000s):

a. Profit margin on sales = Net income ÷ Sales = 5%

Sales = $15 ÷ 5% = $300

Intermediate Accounting, 8/e 5–173

Air France–KLM Case

Requirement 1

a. AF’s balance sheet indicates current deferred revenue on ticket sales of

€2,371 million as of December 31, 2013.

Requirement 2

a. From note 4.7: “In accordance with the IFRIC 13, these ‘miles’ are

considered as distinct elements from a sale with multiple elements and one

part of the price of the initial sale of the airfare is allocated to these ‘miles’

and deferred until the Group’s commitments relating to these ‘miles’ has

been met.

APPENDIX CASES

Judgment Case 5–17

Requirement 1

The three methods that could be used to recognize revenue and costs for this

situation are (1) point of delivery, (2) the installment sales method, and (3) the cost

recovery method.

2016 gross profit under the three methods:

(1) point of delivery:

Intermediate Accounting, 8/e 5–175

Case 5-17 (concluded)

Requirement 2

Customers sometimes are allowed to pay for purchases in installments over

long periods of time. Uncertainty about collection of a receivable normally increases

with the length of time allowed for payment. In most situations, the increased

IFRS Case 5–18

Vodafone’s revenue recognition policies for products and services are similar to

revenue recognition policies in the U.S. Sales of products are recorded when goods

IFRS Case 5–19

Requirement 1

Per the revenue recognition section of ThyssenKrupp’s 2013 annual report, note

Requirement 2

Similar accounting would be used under U.S. GAAP.

Intermediate Accounting, 8/e 5–177

Trueblood Accounting Case 5–20

Trueblood Accounting Case 5–21

Trueblood Accounting Case 5–22

Real World Case 5–23

Requirement 3

The following is from the 2013 10K of Jack in the Box, Inc. The responses to

the question will vary if the company has since changed its revenue recognition

policy.

Requirement 4