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In class we discussed a number of situations where a sellercould recognize revenue before it has fully completed everyobligation under a contract. Which of the following items does NOTrepresent one of these situations?

Sale without a fixed price
Substantial completion of a contract (i.e., onlyinconsequential obligations remain)
A multiple-element arrangement
Percentage-of-completion accounting for a long-termcontract
Bill-and-hold sale
Sale with a return policy (provided certain conditions aremet)

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Question 21 pts

In class we discussed a couple situations where a seller wouldnot be able to recognize revenue even though it had shipped an itemto a customer. Which of the following items does NOT represent oneof these situations? (i.e., in which of these cases can revenue berecognized?)

Goods shipped but still in transit, with FOB shipping pointterms
Goods shipped but still in transit, with FOB destinationterms
Goods delivered on consignment
Goods delivered to a customer, where customer acceptance hasn’tyet occurred

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Question 31 pts

Seller’s sales contract specifies that legal title transfers tocustomers upon shipment from its facility. However, in the eventthat a product is lost or damaged in shipment, Seller has a pastpractice of supplying a replacement product at no charge to thecustomer. When should Seller recognize revenue?

When the product arrives at the customer’s facility
When the product is shipped from Seller’s facility
When Seller receives payment from the customer

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Question 41 pts

For which type of customer acceptance are revenues recognizednet (instead of gross)?

Acceptance based on subjective criteria
Acceptance based on customer-specified objective criteria
Acceptance based on seller-specified objective criteria

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Question 51 pts

In 2015, Constructor Corp. began a three-year, long-termconstruction project that qualified for percentage-of-completionaccounting. Constructor’s customer agreed to pay $300,000. By theend of 2015, Constructor had incurred costs of $60,000 and expectedto spend an additional $180,000 over the next two years. How muchrevenue will Constructor report on the project in its 2015 incomestatement?

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Question 61 pts

On December 12, 2014, Customer purchased two pieces of equipmentfor $105. Seller delivered Item A on December 13 but doesn’t expectto deliver Item B until the following February. Seller doesn’t selleither items separately (only as a pair), but Seller estimates theindividual selling prices to be $40 for item A and $80 for item B.Assuming this contract meets the criteria for separation as amultiple-element arrangement, how much revenue can Seller recognizein the fiscal year ending December 31, 2014?

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Casey Durgan
Casey DurganLv2
28 Sep 2019

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Travis Company has just completed a physical inventory count at year-end, December 31 of the current year. Only the items on the shelves, in storage, and in the receiving area were counted and costed on a FIFO basis. The inventory amounted to $66,500. During the audit, the independent CPA developed the following additional information: Goods costing $910 were being used by a customer on a trial basis and were excluded from the inventory count at December 31 of the current year. Goods in transit on December 31 of the current year, from a supplier, with terms FOB destination (explained in the “Required” section), cost $1,400. Because these goods had not yet arrived, they were excluded from the physical inventory count. On December 31 of the current year, goods in transit to customers, with terms FOB shipping point, amounted to $1,800 (expected delivery date January 10 of next year). Because the goods had been shipped, they were excluded from the physical inventory count. On December 28 of the current year, a customer purchased goods for cash amounting to $3,050 and left them “for pickup on January 3 of next year.” Travis Company had paid $1,720 for the goods and, because they were on hand, included the latter amount in the physical inventory count. On the date of the inventory count, the company received notice from a supplier that goods ordered earlier at a cost of $4,000 had been delivered to the transportation company on December 27 of the current year; the terms were FOB shipping point. Because the shipment had not arrived by December 31 of the current year, it was excluded from the physical inventory count. On December 31 current year, the company shipped $1,700 worth of goods to a customer, FOB destination. The goods are expected to arrive at their destination no earlier than January 8 of next year. Because the goods were not on hand, they were not included in the physical inventory count. One of the items sold by the company has such a low volume that management planned to drop it last year. To induce Travis Company to continue carrying the item, the manufacturer-supplier provided the item on a “consignment basis.” This means that the manufacturer-supplier retains ownership of the item, and Travis Company (the consignee) has no responsibility to pay for the items until they are sold to a customer. Each month, Travis Company sends a report to the manufacturer on the number sold and remits cash for the cost. At the end of December of the current year, Travis Company had seven of these items on hand; therefore, they were included in the physical inventory count at $780 each. Required: Assume that Travis’s accounting policy requires including in inventory all goods for which it has title. Note that the point where title (ownership) changes hands is determined by the shipping terms in the sales contract. When goods are shipped “FOB shipping point,” title changes hands at shipment and the buyer normally pays for shipping. When they are shipped “FOB destination,” title changes hands on delivery, and the seller normally pays for shipping. Begin with the $66,500 inventory amount and compute the correct amount for the ending inventory. (Deductible amounts should be entered with a minus sign. If no adjustment is necessary, enter a 0 in the cell.)


DSY Cable Inc. (the “Company”), a publicly traded company,manufactures and sells coaxial and fiber-optical cable. DSY iscontemplating two separate transactions for which it is evaluatingthe appropriate revenue recognition.
Transaction 1
Loon Inc., a customer of DSY, has entered into a binding writtenagreement to purchase
1,000 feet of 18 American wire gage (AWG) cable for $3 per foot.Because Loon is
constructing a new warehouse, it is unable to take delivery of thecable and has requested
in writing that DSY store the cable in its warehouse untilconstruction of Loon’s warehouse
is completed. Loon’s warehouse will be completed three months fromthe time of purchase,
at which time Loon is required to take delivery of the cable. DSYstores 18 AWG cable in
10,000-foot spools (spools of cable are considered finished goodsand ready for shipment).
DSY will not physically segregate the cable that Loon willpurchase; rather, the Company
will designate the quantity in its inventory tracking system as“sold,” thereby preventing
the use of the cable to fulfill other customer orders. In otherwords, DSY will “virtually”
segregate the inventory. DSY and its auditors have concluded thefollowing with respect to
the arrangement with Loon:
 Risks of ownership of the cable have passed to Loon.
 Loon has a substantial business purpose for requesting DSY tohold the cable at its
warehouse (waiting on completion of the warehouse).
 DSY does not have additional performance obligations with respectto the cable
purchased by Loon.
DSY concluded that it is appropriate to recognize revenue forTransaction 1 before the date
on which Loon takes delivery of the 1,000 feet of 18 AWG coaxialcable.
Transaction 2
Fiber Communication Inc., a customer of DSY, entered into a bindingwritten agreement to
purchase 1,500 feet of fiber-optical cable for $3 per foot. FiberCommunication’s shipping
terms are freight on board (FOB) shipping point, and DSY collectedpayment before the
order shipped. Title transfers upon delivery to the carrier, andFiber Communication will
insure the product while it is in transit. Instead of using athird-party shipper (e.g., FedEx,
2
UPS), DSY elected to use its own logistics subsidiary, TransNetInc.* to deliver the cable to
Fiber Communication Inc.
Requirements
1. Is it appropriate for DSY to recognize revenue associated withTransaction 1 before
the date on which Loon takes delivery of the 1,000 feet of 18 AWGcoaxial cable?
Identify and research the existing guidance on revenue recognition(i.e., NOT FASB
ASC 606). Based on your research and interpretation of theguidance, develop two
or more alternative accounting treatments and discuss thealternative that you
believe is most appropriate.
2. Is it appropriate to recognize revenue upon transfer of theinventory to the carrier
in Transaction 2? Identify and research the existing guidance onrevenue
recognition. Based on your research and interpretation of theguidance, develop two
or more alternative accounting treatments and discuss thealternative that you
believe is most appropriate.
3. The new revenue recognition guidance, FASB ASC 606, Revenue FromContracts
With Customers, provides five steps to recognizing revenue; step 5requires an
entity to “recognize revenue when (or as) the entity satisfies aperformance
obligation.” Describe in general the key principles of this step(and any applicable
implementation guidance) that would be relevant to determining howto recognize
revenue for the transactions described in this case. Please bespecific when
discussing the sections of FASB ASC 606 that are relevant to therevenue recognition
issues discussed in requirements 1 and 2. Also, be sure tocompletely discuss how
the revenue recognition for requirements 1 and 2 would be thesimilar or different
under FASB ASC 606 compared to the existing guidance on revenuerecognition.

Case 1-1 You are the new chief financial officer for Redlands Manufacturing, Inc. The firm that you have just joined has recently paid substantial penalties to settle claims related to fraudulent financial reporting practices. The Board of Directors has also created an Office of Ethics and Compliance in response to the scandals. Francis Bacon, the chief of the newly created ethics office, recently dropped by your office for some insights about accounting and fraudulent financial reporting. The chief ethicist stated that he has a background in philosophy, but he lacks understanding of the accounting discipline. He identifies the tactics that the company employed when it essentially cooked its books. Bacon stated that Redlands employed some devious practices that were obviously unethical, but that he lacked the accounting vocabulary to articulate their financial statement consequences. He essentially wanted to understand why specific practices violated accounting standards, and sought your help with this matter. Bacon began by stating, “I have identified five types of arrangements that Redlands engaged in over the period in question. Each type of activity has a clever sounding name. Here is my list:” Channel Stuffing. Redlands shipped manufactured goods to certain retailers, in certain instances regardless of whether or not the retailers ordered the products. Our firm recognized revenues upon shipment of these non-ordered items, which usually took place towards the end of the year. We informally agreed to take back the merchandise if the retailer could not sell it. It was kind of a wink and a nod deal. Redlands did not recognize an allowance for the merchandise that its retailers could return. Vendor Dinging. Our firm told many of its suppliers that they were shipped a disproportionately large number of raw materials that did not conform to contracted specifications. Consequently, Redlands unilaterally decreased its cash payments to those vendors. Most of the suppliers did not dispute our claims and merely reduced our obligation to them. Of course, many of those materials were of acceptable quality and we used them in manufacturing our products. Capitalizing Revenue Expenditures. Redlands placed numerous recurring business costs on its balance sheet as long-term assets, rather than charging the full cost of the item as an expense in the current reporting period. Our firm then recognized only a portion of those questionable assets’ cost as a current expense, which we called depreciation. These costs, such as salaries expense, had no future benefit beyond the current reporting period. Special Purpose Entities (SPEs). Redlands Manufacturing shielded debt (liabilities) from its balance sheet with these types of arrangements. Our firm contracted with ostensibly independent companies in business ventures that were debt financed. The other companies, not Redlands, reported the debt on their balance sheets. Our SPE partners, however, consisted of businesses established by Redlands executives. Bacon told you that he was preparing to make his initial address to the Board of Directors concerning staff training which should insure that the firm does not engage in the above practices, or any other ones like them. He wants you to explain to him how such unethical practices violate accounting conventions, and how they inflated the financial appearance of the firm. Required: Write a memorandum to Francis Bacon explaining how each practice violates generally accepted accounting principles, and how each type of transaction might affect reported income, financial position, and cash flows.

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