ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 26, No. 3 DOI: XXXXXXXXXX/iace-50029 2011 pp. 609–618 A Series of Revenue Recognition Research Cases Using the Codification R. Mark...

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ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 26, No. 3 DOI: 10.2308/iace-50029 2011 pp. 609–618 A Series of Revenue Recognition Research Cases Using the Codification R. Mark Alford, Teresa M. DiMattia, Nancy T. Hill, and Kevin T. Stevens ABSTRACT: This series of four short cases is designed to help students develop the skills to research the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification and other authoritative literature. It also is designed to help improve students’ ability to analyze and critique the complex issues that often surround the accounting for revenue recognition. The case scenarios describe transactions in which students must decide whether, when, and how much revenue to recognize. The issues analyzed involve bill-and-hold, multiple-element arrangements, gross versus net revenue reporting, and sales incentives. The cases are also designed to improve teamwork and communication skills. The sequence of cases is intended for use in an intermediate accounting class that covers revenue recognition, or in a capstone class that emphasizes critical thinking and research skills. Keywords: revenue; recognition; codification; research. INTRODUCTION R evenue recognition is one of the top causes for financial statement restatements (Whitehouse 2010). In addition, revenue recognition is an area commonly questioned by the Securities and Exchange Commission (SEC) staff in their review of public filings and resultant comment letter process (Deloitte 2009). Furthermore, revenue recognition is often prey to financial fraud (PricewaterhouseCoopers 2009). Coverage of revenue recognition in intermediate accounting courses is typically limited to learning and applying the criteria for revenue recognition outlined in the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, to routine transactions and topics, such as long-term construction contracts and installment sales (FASB 1984). While these topics are important, there are literally hundreds of revenue-generating transactions that are not covered in the traditional financial accounting sequence. The purpose of these cases is to enhance students’ research and critical thinking skills through resolving ambiguous revenue recognition cases, using the FASB’s (2009) Accounting Standards Codification (Codification or ASC) and other authoritative literature, including SEC Staff R. Mark Alford is an Associate Professor, Teresa M. DiMattia is an Instructor, Nancy T. Hill is a Professor, and Kevin T. Stevens is a Professor, all at DePaul University. Published Online: August 2011 609 Accounting Bulletin, Topic 13: Revenue Recognition (SEC 2003). In addition, the cases seek to enhance students’ research, oral, and written skills. CASE MATERIALS Below are the case facts and case requirements for four revenue recognition cases. Case One: Facts Consumer Cleaning Products Corporation (CCPC) is a public company with a calendar year- end. CCPC manufactures detergent that is ultimately purchased (and used) by consumers. The supply chain consists of the following: � CCPC sells its detergent to a wholesaler; � The wholesaler sells the detergent to a retailer; and � The retailer sells the detergent to a consumer. CCPC launches a new detergent, Fresh & Bright, on September 1, 2009. In connection with this launch, CCPC developed a comprehensive marketing campaign. Part of that campaign involves releasing (‘‘dropping’’) approximately 500,000 coupons in Sunday newspapers in locales in which Fresh & Bright will be sold. When a consumer redeems the coupon upon purchasing a bottle of Fresh & Bright from a retailer, the price charged to the consumer is reduced by $2. The retailer at which the coupon is redeemed sends the coupon to a clearinghouse. CCPC reimburses the retailer for the discount provided to the customer. CCPC discontinues the coupons for its new detergent on October 1, 2009. The coupons expire on October 1, 2010. CCPC has not offered coupons on detergent before, nor have they offered coupons with a one-year expiration period. They have, however, offered coupons with a six-month expiration date on other products. Those coupons had a 1.5 percent redemption rate. CCPC estimates that approximately 2 percent of the detergent coupons will be redeemed by customers prior to the expiration date. However, CCPC does not have any data on the redemption rate for coupons offered on detergent. CCPC has sold (and recognized revenue for) over $2,000,000 of Fresh & Bright into the supply chain by September 30, 2009. Case 1: Requirements CCPC is considering how it should account for the Fresh & Bright coupon drop that took place on October 1, 2009. In doing so, CCPC asks for your help. Prepare a memo addressing the following questions. Base your analysis of the following questions on the relevant authoritative literature and discuss the support in that literature for your conclusions. Be sure to cite the relevant components of the Codification (available at: http://asc.fasb.org) in your discussion. Citations are not required for journal entries. 1. What are the accounting issue(s) and the relevant components of the authoritative literature? 2. When should CCPC recognize the effects of the Fresh & Bright coupon drop in its financial statements? 3. What is the dollar amount of the effect of the Fresh & Bright coupon drop on CCPC’s financial statements? 4. What would constitute ‘‘sufficient evidence’’ to support CCPC’s expected redemption rate of 2 percent? 5. What are the accounting implications if CCPC’s estimated redemption rate changes to 2.5 percent at a later point in time? 610 Alford, DiMattia, Hill, and Stevens Issues in Accounting Education Volume 26, No. 3, 2011 http://asc.fasb.org 6. How should the effects of the Fresh & Bright coupon drop be reflected in the income statement? 7. What are the necessary journal entries? 8. Prepare a PowerPoint presentation that covers the following points: a. A summary of the case facts and an explanation of the accounting issue(s) that the case raises. b. Identification and discussion of the relevant sections of the Codification that address the facts in the case. c. Conclusions reached in applying the authoritative literature to the case facts and the questions above. d. Any necessary journal entries. Case Two: Facts Landline Corporation is a public company with a calendar year-end. Landline provides a wide variety of telecommunications services to a number of different customer groups, including routing calls to one of several providers of psychic services with whom Landline has contracts. In October 20X9, a new psychic service provider, Psychics ‘R’ Us (PRU), enters into an agreement with Landline, and Landline adds PRU to its providers of psychic services. When a customer calls a particular ‘‘1-900’’ number, (1) Landline is responsible for routing the call to PRU’s offices or to those of another psychic service provider, depending on the availability of psychics to take the call, and (2) if one of PRU’s psychics answers the call, he or she provides psychic advice to the customer. The arrangement between Landline and PRU calls for Landline to bill the customer $5 per minute spent using PRU’s ‘‘1-900’’ number. This per-minute charge is set by Landline and is consistent with the amount charged per minute for advice from non-PRU psychics. The charge on the customer’s bill notes the source of the billing as ‘‘Psychics ‘R’ Us.’’ Landline is responsible for remitting $4 per minute to PRU. If a customer does not pay the $5 per minute, Landline is still responsible for paying PRU the $4 net amount per minute for that customer’s usage of the ‘‘1-900’’ number. All marketing for the psychic services is performed and paid for by PRU. Landline is not mentioned in PRU’s marketing campaign. When the customer calls the ‘‘1-900’’ number and that call is routed to PRU’s offices, the psychic that answers identifies himself or herself as ‘‘a psychic with Psychics ‘R’ Us.’’ Case Two: Requirements Landline is considering whether it should recognize revenue related to its arrangement with PRU on a gross or net basis. In doing so, Landline asks for your help. Prepare a memo addressing the following questions. Base your analysis of the following questions on the relevant authoritative literature and discuss the support in that literature for your conclusions. Be sure to cite the relevant components of the Codification (available at: http://asc.fasb.org) in your discussion. Citations are not required for journal entries. 1. What are the accounting issue(s) and the relevant components of the authoritative literature? Assume, for purposes of interpreting the Codification, that Landline is the ‘‘entity.’’ 2. Should Landline recognize revenue gross (i.e., as a principal) for the amount billed to the customer for their time spent using the ‘‘1-900’’ number, or net (i.e., as an agent) for the net amount retained by Landline? A Series of Revenue Recognition Research Cases Using the Codification 611 Issues in Accounting Education Volume 26, No. 3, 2011 http://asc.fasb.org 3. What journal entries are necessary to appropriately account for each minute a customer spends using PRU’s ‘‘1-900’’ number? 4. Prepare a PowerPoint presentation that covers the following points: a. A summary of the case facts and an explanation of the accounting issue(s) that the case raises. b. Identification and discussion of the relevant sections of the Codification that address the facts in the case. c. Conclusions reached in applying the authoritative literature to the case facts and the questions above. d. Any necessary journal entries. Case Three: Facts Assembly Lines Incorporated (ALI) is a public company with a calendar year-end. In its current fiscal quarter, ending September 30, 20X9, it entered into a sales agreement with Candy Maker International (CMI). Under the sales agreement, ALI is selling an assembly line system to CMI that consists of the following three components: � Mixer Segment � Molding Segment � Packaging Segment ALI will install the assembly line system at CMI’s Chicago manufacturing facility, where it will be used by CMI to manufacture candy bars. The sales agreement between ALI and CMI provides for the following pricing: Mixer Segment $40,000 Molding Segment 30,000 Packaging Segment 20,000 Installation 10,000 Total $100,000 The sales agreement is dated September 14, 20X9. ALI agrees to deliver the mixer segment and molding segment to CMI by September 25, 20X9, as ALI has those two components of the assembly line system on hand at the time the sales agreement is entered into. The sales agreement does not provide CMI with a general right of return for any components of the assembly line. A competitor offers a similar assembly line system. ALI delivers the two components of the assembly line system on September 20, 20X9, and agrees to deliver the packaging segment to CMI by December 20, 20X9. The delivery date for the packaging segment is delayed because ALI does not have that component of the assembly line system on hand at the time the sales agreement is entered into. As such, ALI has to manufacture that component of the line. Because of the backlog of orders ALI has in its manufacturing department at the time it enters into the sales agreement with CMI, it cannot commit to delivering the packaging