II. Revenue Recognition Cases In class we discuss broad revenue recognition prin
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Question
II. Revenue Recognition Cases
In class we discuss broad revenue recognition principles and a selection of specific situations (e.g., bill-and-hold sales, consignments, etc.). The purpose of these three cases is to expose you to the accounting for revenues in other unique situations in addition to those discussed in class. For each case, you will need to research online the appropriate accounting (under current, not future, revenue recognition rules) and then answer the questions below.
Accounting for Gift Cards
Mr. Ping’s Noodle Shop opened in December 2015 with locations in Maryland and Delaware. As a holiday promotion, it offered for sale $25 gift cards for a discounted price of $20.
The following information is available as of Dec. 31, 2015:
Maryland
Delaware
a. Number of gift cards sold
250
100
b. Value of gift cards sold (= a ´ $25)
$6,250
$2,500
c. Cash collected from gift card sales (= a ´ $20)
$5,000
$2,000
d. Amount of gift card redemptions
$900
$350
e. Remaining gift card balances (= b – d)
$5,350
$2,150
f. Expected future gift card redemptions
$4,100
$1,650
g. Expected unused gift card balances (= e – f)
$1,250
$500
Escheat laws in Delaware require that unclaimed property, including unused gift card balances, must be turned over to the state after it becomes clear the customer will not redeem the remaining balance. Gift cards are exempt from escheat laws in Maryland.
1. How much revenue should Mr. Ping recognize in 2015 for gift card sales in Maryland?
2. How much revenue should Mr. Ping recognize in 2015 for gift card sales in Delaware?
- For 1 and 2, show your calculations and briefly explain your reasoning behind them. Then provide the journal entries that Mr. Ping would record during 2015 for these gift cards.
Gross vs. Net Recognition of Revenues
Genco Import Company is an Internet-based online shopping platform that sells products to customers on behalf of various suppliers. Suppliers submit their product offerings, specifications, and prices to Genco, which Genco displays on its website. At the time of each customer order, Genco collects payment from the customer and directs the supplier to ship directly to the customer. Genco keeps a 15% of the sales price and forwards the remaining 85% to the supplier. During 2015, Genco collected $2,000,000 from customers and forwarded $1,700,000 to suppliers.
1. How much revenue should Genco recognize during 2015 for these sales? Justify your answer using the guidelines in EITF 99-19.
Accounting for Sales Incentives
Bubble’s Depo advertises that with each mattress purchased, customers will receive a free 30” television. Mattresses sell for $1,300 and have a 70% margin. The televisions cost Bubbles $210 each.
The following information is available for sales during 2015:
a. Number of mattresses sold
100
b. Cost of mattresses sold (= a ´ $390)
$39,000
c. Price of mattresses sold (= a ´ $1,300)
$130,000
d. Cost of televisions (= a ´ $210)
$21,000
1. Should the $21,000 cost of televisions be reported as a reduction in revenue, cost of goods sold, or some other expense? Justify your answer using the guidelines in EITF 01-9.
2. Given the answer to #1 above, how much revenue should Bubbles recognize in 2015 for mattress sales?
Maryland
Delaware
a. Number of gift cards sold
250
100
b. Value of gift cards sold (= a ´ $25)
$6,250
$2,500
c. Cash collected from gift card sales (= a ´ $20)
$5,000
$2,000
d. Amount of gift card redemptions
$900
$350
e. Remaining gift card balances (= b – d)
$5,350
$2,150
f. Expected future gift card redemptions
$4,100
$1,650
g. Expected unused gift card balances (= e – f)
$1,250
$500
Explanation / Answer
Particulars Maryland Delaware Value of gift cards Sold 6250 2500 Less: Amount of gift card Redemption 900 350 Expected unused gift card balance 500 Revenue to be recongnise 5350 1650 Journal entry for Revenue in Maryaland Bank A/c - Dr 5000 Discout to Customer - Dr 1250 To Revenue 5350 To Redemption of gift cards 900 (Being Revenue recongsied on gift cards sold ) Journal entry for Revenue in Deleware Bank A/c - Dr 2000 To Revenue 1650 To Redemption of gift cards 350 (Being Revenue recongsied on gift cards sold ) Q.No - 2 Gross vs. Net Recognition of Revenues EITF 99-19: Reporting Revenue Gross as a Principal Versus Net as an Agent In accordance with the criteria of EITF 99-19, the Company recognizes revenue gross when it acts as a principal, has discretion to choose suppliers, bears credit risk and performs part of the services required in the transaction. If the above criteria are not met, the Company recognizes revenue net of related costs. During the year 2015 the Genco should recognise the total revenue would be $ 17,00,000 Here Genco Import company acting as Agent only because Genco display what the supplier provided information So As per EITF 99-19 Net amount to be recongnise if company act as agent. Accounting Changes for Sales Incentives Cause Restatements (EITF-01-9) Types of Sales Incentives Payments and incentives given by a manufacturer (or vendor) to a retailer (or reseller) are common in certain industries. Slotting fees, buydowns, and cooperative advertising are common incentives. Slotting fees are consideration given to a retailer to obtain space on the retailer’s shelves or in the retailer’s catalog, and payments for brand development or new-product introduction. In a buydown program, a vendor reimburses or issues credit memos to a retailer for decreased revenue during a promotion period. Related forms of consideration include factory incentives, dealer holdbacks, price protection, and factory-to-dealer incentives. Cooperative advertising programs provide for vendor participation in the cost of a reseller’s advertising. The amount reimbursed to the reseller typically is limited to a specified percentage of purchases from the vendor. Sales incentives are also provided by vendors to indirect customers. For example, manufacturers provide discounts, coupons, rebates, and free products or services to the consumer or end user, rather than the retailer. Classification. When a company sells a product or service and also provides consideration to the customer, how should the cost of the consideration be classified? Has the company effectively adjusted the sales price, and therefore earned less revenue, or has the company incurred a cost in making the sale? The answer depends upon whether the consideration is in the form of cash or in the form of a free product or service. Cash consideration includes not only actual cash payments to the customer, but also incentives that reduce the customer’s present or future payment obligation. For example, credits against future purchases are a cash consideration. Examples of free products or services include gift certificates or free airline tickets that will be honored by another, unrelated entity. Cash Consideration The EITF reached a consensus that cash consideration given by a vendor to a customer constitutes by presumption a reduction of the selling price of the vendor’s products or services and, therefore, should be characterized as a reduction of revenue. The presumption is that the consideration cannot be separated from the revenue transaction. That presumption can be overcome if two conditions are met: separability and measurability. Cash consideration can be separated from the revenue transaction if the vendor receives an identifiable benefit in exchange for the consideration. The identified benefit must be sufficiently separable from the customer’s purchase of the vendor’s products that the vendor could have acquired the benefit from someone other than the customer. Slotting fees, product placement fees, and fees to obtain an exclusive supply contract would not meet this condition, because the vendor does not receive a benefit that can be separated from the sale of the vendor’s product. Cooperative advertising, on the other hand, could meet this criterion because the vendor could have purchased the advertising from someone other than the customer, and the vendor obtains a benefit that can be separated from the sale to this particular customer. Measurability requires that the fair value of the benefit received by the vendor can be reasonably estimated. Cooperative advertising and other payments for advertising often meet this condition because the vendor may be able to determine what the advertising would have cost if obtained from another party. If the above conditions are met, the consideration would be classified as an expense rather than as a reduction to revenue. The amount classified as an expense, however, would be limited to the fair value of the benefit received by the vendor. If the consideration paid by the vendor exceeds the fair value of the benefit received, the excess would be classified as a reduction to revenue. Q No - 3 1) $ 21000 television cost shown as saparate expenses because this cost is separately identifiable and fair value of that benefit is determinable. 2) $ 130000 should be recongnize the revenue during the year.