Income recognition for various businesses. Discuss when each of the following businesses should recognize revenue and any income measurement issues that arise.

a. Company A develops software and sells it to customers for an up-front fee. Company A provides these customers with password-protected access to its web site for two years after delivery of the software. With this access, customers can download certain data and other software. Company A has an obligation to provide updates on its web site.

b. Company B develops software and sells it to newly formed storage application service providers (SAPs). who promise to pay for the software over the next two years. These SAPs in turn place the software on their web sites and sell rights to access the software to its customers.

c. Company C develops software that it places on its web site. It sells rights to access this software on-line to its customers for a period of two years. Customers pay an up-front fee for the right to access the software.

d. Company D maintains an auction site on the web. It charges customers an up-front fee to list products for sale and a transaction fee when a sale takes place. The transaction fee is refundable if the auction winner fails to honor its commitment to purchase the product.

e. Company E sells products of various companies on its web site. Company E transmits customers' purchase requests to the various supplier companies, who fill the orders. Cus- tomers charge for their purchases on third-party credit cards. Company E receives a fee from the supplier companies for each item sold.

f. Company F sells products of various companies on its web site. It promises to sell a minimum number of items each month and pays storage and insurance costs for that minimum number of units. Actual storage of these units takes place at the suppliers' warehouse. The suppliers also handle shipments to customers. Customers charge for their purchases on third-party credit cards.

g. Company G manufactures and sells personal computers (PCs). Customers receive a $400 rebate on the purchase of the computer if they will purchase Internet access services for three years after the purchase of the computer. Customers mail their rebate coupon to the Internet service provider (called an ISP; for example, AOL. AT&T). The ISP bears 90 per- cent on the initial cost of the rebate and the PC manufacturer bears the other 10 percent.

If customers do not subscribe for the full three-year period, the parties reallocate the cost of the rebate, initially borne $360 (= 0.90 X $400) by the ISP and $40 (= 0.10 X $400)

by the manufacturer, resulting in the PC manufacturer's paying the ISP to reduce the ISP's share of the rebate's cost from $360 to a smaller amount.

h. Company H sells advertising space on its web site to other companies. For an up-front fee.

Company H guarantees a certain minimum number of hits, viewings, or click-throughs each month of the one-year contract period. It must return a pro rata portion of the fee if the hits and click-throughs fall short of the guarantee.

i. Company I sells advertising space on its web site to other companies. It recently received 10,000 shares of common stock of Upstart Company in payment for certain advertising space. Upstart Company intends to make an initial public offering of its common stock in six months. At the most recent financing round, venture capitalists paid $10 per share for the common stock.

j. Company J and Corapanj K both maintain web sites. Each company "sells" advertising space to the other company lor an agreed-upon period, with no mone\ changing hands.
PROBLEMS AND CASES