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A contract (Points : 3)

must be in writing tobe an enforceable contract.
is an agreement thatcreates enforceable rights and obligations.
is enforceable if eachparty can unilaterally terminate the contract.
does not need to havecommercial substance.

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Irving Heathcote
Irving HeathcoteLv2
28 Sep 2019

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LMC Solutions(LMC) is a publicly-traded marketing company that offers a variety of marketing offerings to its customers. Specifically:

• LMC will create a TV commercial for $1M, build an app for $500K, and build a Facebook page for $250K. These amounts represent LMC’s charges for these items when LMC sells them separately to customers. The TV commercial, the app, and the Facebook page are not interrelated; that is, each functions independently of the other offerings.

• If a customer purchases all aforementioned items together, the total cost is $1.5M. Payment terms are 50 percent consideration due at contract signing, with the remaining 50 percent due over the rest of the development period (25 percent at mid-point, 25 percent at completion).

• If the app is downloaded 500K times or more in the first month, there is a one-time bonus of $250K payable to LMC.

Acme Equipment Co., a customer, approaches LMC with the hopes of reinventing its image to a younger customer base. Acme has a verbal agreement with LMC that is based on LMC’s unsigned quote to Acme on January 15, 2018, for one TV commercial, one app, and a Facebook page. The agreement creates enforceable rights and obligations pursuant to LMC’s customary business practices. None of these items can be redirected by LMC to another customer. LMC performed a credit check on Acme and has determined that Acme has the intention and ability to pay LMC for fulfilling its portion of the contract. Acme is required to pay LMC for performance completed to date if Acme cancels the contract with LMC for reasons other than LMC’s failure to perform under the contract as promised.

Acme makes a payment on January 15, 2018, in the amount of $750K pursuant to the agreement. From the date of the quote, it takes LMC six months to develop and produce the TV commercial, two weeks to complete the Facebook page, and three months to complete a fully functioning app. LMC believes there is 40% chance that the app will be downloaded 500K times in the first month.

Required: Explain how LMC will determine the appropriate amounts of revenue to recognize under this contract. Your explanation should include all steps LMC must complete in the revenue recognition process and should identify the amounts and timing of LMC’s recognition of revenue. Cite appropriate authoritative support for your answer.

LMC Solutions(LMC) is a publicly-traded marketing company that offers a variety of marketing offerings to its customers. Specifically: • LMC will create a TV commercial for $1M, build an app for $500K, and build a Facebook page for $250K. These amounts represent LMC’s charges for these items when LMC sells them separately to customers. The TV commercial, the app, and the Facebook page are not interrelated; that is, each functions independently of the other offerings. • If a customer purchases all aforementioned items together, the total cost is $1.5M. Payment terms are 50 percent consideration due at contract signing, with the remaining 50 percent due over the rest of the development period (25 percent at mid-point, 25 percent at completion). • If the app is downloaded 500K times or more in the first month, there is a one-time bonus of $250K payable to LMC. Acme Equipment Co., a customer, approaches LMC with the hopes of reinventing its image to a younger customer base. Acme has a verbal agreement with LMC that is based on LMC’s unsigned quote to Acme on January 15, 2018, for one TV commercial, one app, and a Facebook page. The agreement creates enforceable rights and obligations pursuant to LMC’s customary business practices. None of these items can be redirected by LMC to another customer. LMC performed a credit check on Acme and has determined that Acme has the intention and ability to pay LMC for fulfilling its portion of the contract. Acme is required to pay LMC for performance completed to date if Acme cancels the contract with LMC for reasons other than LMC’s failure to perform under the contract as promised. Acme makes a payment on January 15, 2018, in the amount of $750K pursuant to the agreement. From the date of the quote, it takes LMC six months to develop and produce the TV commercial, two weeks to complete the Facebook page, and three months to complete a fully functioning app. LMC believes there is 40% chance that the app will be downloaded 500K times in the first month. Required: Explain how LMC will determine the appropriate amounts of revenue to recognize under this contract. Your explanation should include all steps LMC must complete in the revenue recognition process and should identify the amounts and timing of LMC’s recognition of revenue. Cite appropriate authoritative support for your answer.

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