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ADM 2342 Chapter Notes - Chapter 6: Accounts Receivable, Profit Margin, Debits And Credits

51 views7 pages
greenscorpion188
29 Jan 2017
School
University of Ottawa
Department
Administration
Course
ADM 2342
Professor
Brian Conheady

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Document Summary

Five-step revenue recognition process: identify the contract with customers, identify the separate performance obligations in the contract, determine the transaction price, allocate the transaction price to the separate performance obligations, recognize revenue when each performance obligation is satisfied. Identifying the contract with customers step 1. Contract: an agreement between two or more parties that creates enforceable rights or obligations. A contract can be written, oral, or implied from customary business practice. A company does not recognize contract assets or liabilities until one or both parties to the contract perform. The signing of the contract by the two parties is not recorded (no journal entry required) until one or both of the parties perform under the contract. Until performance occurs, no net asset or net liability occurs. On march 1, 2017, margo company enters into a contract to transfer a product to soon yoon on july 31, 2017.

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Related Questions

A New York City daily newspaper called “Manhattan Today” chargesan annual subscription fee of $108. Customers prepay theirsubscriptions and receive 220 issues over the year. To attract moresubscribers, the company offered new subscribers the ability to pay$110 for an annual subscription that also would include a coupon toreceive a 40% discount on a one-hour ride through Central Park in ahorse-drawn carriage. The list price of a carriage ride is $100 perhour. The company estimates that approximately 30% of the couponswill be redeemed.

Required:
1. How much revenue should Manhattan Todayrecognize upon receipt of the $110 subscription price?

2. How many performance obligations exist inthis contract?

3.

Prepare the journal entry to recognize sale of 11 newsubscriptions, clearly identifying the revenue or unearned revenueassociated with each performance obligation. (If no entryis required for a transaction/event, select "No journal entryrequired" in the first account field.)

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.