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

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subject Authors David Spiceland, James Sepe, Mark Nelson, Wayne Thomas

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Case 57 (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
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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
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Real World Case 59
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.
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Case 59 (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.
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Case 59 (continued)
Requirement 3
a) Orbitz’s “merchant model” revenues:
b) Orbitzs “retail model” revenues:
c) Priceline.coms “merchant revenues for ‘Name Your Own Price® services”:
d) Priceline.com’s “merchant retail services”:
e) Priceline.coms agency revenues:
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Intermediate Accounting, 8/e 5-165
Case 59 (concluded)
Requirement 4
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Research Case 510
Requirement 1
FASB ASC 606105536: “Revenue from Contracts with Customers
OverallImplementation Guidance and IllustrationsPrincipal versus Agent
Considerations.”
Requirement 2
FASB ASC 606105539: “Revenue from Contracts with Customers
OverallImplementation Guidance and IllustrationsPrincipal 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
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Intermediate Accounting, 8/e 5-167
Real World Case 511
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
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Judgment Case 512
Bill’s argument is that recognizing revenue upon project completion is
preferable because it is analogous to point of delivery revenue recognition. That is,
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Intermediate Accounting, 8/e 5-169
Communication Case 513
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 514
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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 515
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:
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Intermediate Accounting, 8/e 5-171
Integrating Case 516
Balance Sheet
Assets
Cash $ 15,000 given
Liabilities and Shareholders’ Equity
Accounts payable $ 25,000 (g)
Income Statement
Sales $300,000 (a)
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Case 516 (concluded)
Calculations ($ in 000s):
a. Profit margin on sales = Net income ÷ Sales = 5%
Sales = $15 ÷ 5% = $300
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Intermediate Accounting, 8/e 5-173
Air FranceKLM 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
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Judgment Case 517
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:
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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
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IFRS Case 518
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 519
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.
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Intermediate Accounting, 8/e 5-177
Trueblood Accounting Case 520
Trueblood Accounting Case 521
Trueblood Accounting Case 522
Real World Case 523
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

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