Question

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.