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ACTG 2010 (Intro to Financial Actg II): Case Issues (Midterm and Final Exam).docx

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York University
ACTG 2010
Jonathan Farrar

ACTG 2010: CASES Revenue Recognition When to Recognize Revenue 1) Risks and rewards are transferred o Rewards: Passing possession to buyer: Customer able to benefit o Risks: Warranty obligations (costs not measurable), Uncertainty of returns (not estimatable), Installation conditions o Risks and rewards will remain with the seller 2) Seller has no continuing obligation 3) Collectability is assured 4) Revenue is measurable 5) Costs are measurable Delivery, Subscription Sales, Advance Payments, Installment Sales, Admission Fees, Professional Service Commission Fees, Membership Fees, Layaway Sales Bill & Hold arrangement – recognize before shipment (buyer takes title and accepts billing) Consignment sale – when producer recognizes revenue when entity sells merchandise Depreciation  How to record depreciation expense 1) Straight-Line o Asset is depreciated by an equal amount over it’s useful life o Same level of profits of its useful life o Objective: Income maximization  Expense spread evenly  Better matching expense to economic benefits 2) Declining Balance o Net book value of asset is reduced by fixed percentage o More benefits for the firm in earlier rather than later years o Risk of obsolescence – becomes out of date – technological advances o Objective: Income minimization  Expense unevenly spread – higher expense beginning 1 ACTG 2010: CASES Capitalize vs. Expense Should __ be capitalized or expensed? 1) Capitalize as an asset & Amortize over periods in which they will bring benefit a) Provide future economic benefit  Help generate revenue – no uncertainty b) Control over goods c) Past transaction d) Measurable  Objective: Income maximization 2) Expense “No future benefit” o Uncertainty of benefit o Difficult matching expense incurred with the revenue it helps generate since period of time if benefit cannot be reasonably estimated o Objective: Income minimization R&D Costs, Advertising costs  always expensed Distributor Fees (can be recorded as prepaid asset), Renovations, Construction expenses relating to building assets, Leased equipment (i.e. – truck) Expense Recognition  Should __ be treated as a period cost OR matched with revenues? 1) Recognition as revenue is recognized “Matching” o Costs are clearly associated with revenue o E.g. – sales commission, delivery expense 2) Recognition as “Period Cost” – When they are incurred o Costs that are not clearly associated with revenue o E.g. – insurance expense, CEO salary/bonuses, advertising, R&D, renovations o Accrued liability recorded often 3) Allocation o Costs benefit many periods and are spread among periods o E.g. – prepaid insurance Commissions, Advertising, Product fees (“song fees”), Renovations Equipment + Installation and shipment costs 1) Record amount for equipment at purchasing price and expense the rest 2) Include costs incurred in the price of equipment purchased 2 ACTG 2010: CASES Bad Debts & AFDA  a. Should they company set up an AFDA?  b. How to estimate bad debt expense?  c. Should the company write-off certain accounts? a. Analysis  Industry comparison – are they experiencing the same  History – risk? May lead to bankruptcy? b. Estimating bad debt expense Whether management would like to emphasize BS or IS relations? What historical info is available and if it can be estimable? 1) Based on % of A/R o By estimating amount of receivables that won’t be collected – aging schedule based on length of time they have been unpaid o Historical info (Aging schedule) o Estimable? o Balance sheet approach – concentrate on ADFA o Match A/R
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