4. For each of the accounting issues, describe the effects of your recommended accounting treatments on the company?s financial statements for the current and subsequent periods. Discuss any disclosure requirements associated with your recommendations. ONLY NEED TO ANSWER THIS QUESTION!!!! ALSO FINANCIAL STATEMENT!!! THE RESTS ARE ALREADY ANSWERED!

ACTG 493 Professor Siyi Li GROUP CASE #4 FALL 2016 Due: Tuesday November 29 Your group will conduct research on an accounting case assigned to you and prepare an accounting issues memo. Each case contains several questions that are essential to the case and should be addressed and incorporated into your memo and presentation. Your memo and presentation should follow the instructions listed in the course syllabus and should address the following issues. Your memo should be no more than ten pages. You should use 12-point Times New Roman font, one-inch margin on all sides, double spacing in the main text and single spacing in the header. You should submit your memo as an attached file online by 9:00 a.m. on Tuesday November 29. You also need to hand in a hard copy at the beginning of class that day. For detailed instructions, please refer to the syllabus. Required: 1. Briefly describe the basic facts of the case. Identify the key accounting issue(s) the company needs to solve. List and describe at least two alternative solutions to each of the accounting issues. 2. Search the FASB Codification to identify authoritative literature that either deals directly with the accounting issue or that provides guidance on an analogous accounting issue. List and describe the authoritative literature in support of each of your alternatives. Identify and describe any non-authoritative literature you use, if any. 3. Evaluate the alternative solutions based on research using conceptual analysis and application of the authoritative professional literature. Present your recommendation of the 'best' solutions and explain. You should also discuss any assumptions you make in your research. 4. For each of the accounting issues, describe the effects of your recommended accounting treatments on the company's financial statements for the current and subsequent periods. Discuss any disclosure requirements associated with your recommendations. Group case assignment: Cases are downloadable from http://www.deloitte.com/us/truebloodcases. Case Case 16-10: Spare The Rod Case 16-2: The Cable Guys Case 15-11: Deal for a Dozer Case 15-5: Trouble at the Resort Group 1,5,9 2,6 3,7 4,8 Groups 6-9 in the 9:30 a.m. class and groups 5-8 in the 11:00 a.m. class will make a presentation to the class on Tuesday November 29. Facts CableCo has entered into an agreement with CoAx to purchase 18 American wire gage coaxial cable for $3 per foot. CableCo is unable to accept a delivery until they finish building their warehouse, so it will store the cable at CoAx's plant until they can pick it up in three months. CoAx will store the cable but it will not physically segregate the cable that was purchased by CableCo. They will virtually mark the cable as sold, so that they do not sell it to another customer. CoAx's auditors determined that risks of ownership of the cable have passed to CableCo, there is a business purpose for CableCo to request CoAx to hold the merchandise, and that CoAx has no additional performance obligation related to cable purchased buy CableCo. CoAx also entered into an agreement with its customer TeleCo to purchase 1,500 feet of fiberoptical cable for $3 per foot. CoAx collected the payment before shipping, which was termed freight on board shipping point. The title is transferred upon delivery to a carrier and TeleCo is required to ensure the product while it's being delivered. CoAx will use its subsidiary to deliver the cable to TeleCo. Accounting Issues An issue with the first transaction is when to recognize the revenue. CoAx believes that it is appropriate to recognize revenue before CableCo takes delivery of the cable. CoAx needs to decide, whether they can recognize the revenue before or after the delivery to CableCo. For the transaction with TeleCo, the main issue is whether CoAx can recognize revenue when goods are transferred to the carrier. Since payment has been received, CoAx can recognize the revenue when it is shipped to the carrier. However, since the carrier is a subsidiary of CoAx, they might not be able to recognize the revenue until it gets delivered because they retain control over the merchandise. Support For the first alternative, we can use ASC 606-10-55-81 to support it. \"A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to the customer at a point in time in the future. For example, a customer may request an entity to enter into such a contract because of the customer's lack of available space for the product or because of delays in the customer's production schedules\". This codification supports the first alternative to record revenue before the delivery. The merchandise in this situation belongs to CableCo, because it has already been sold, and CoAx is only holding it until customer can receive the delivery. For second alternative, which is to record revenue after the delivery to CableCo takes place, we can look at ASC 605-10-05-4. It states that an entity can \"recognize revenue when (or as) the entity satisfies a performance obligationAn entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer.\"We could argue that since merchandise is still at CoAx's location, they still hold control over it and did not satisfy the performance obligation by not transferring goods to the customer. In second transaction, as it is stated in accounting issue, CoAx can recognize revenue for selling cable to TeleCo, before goods are delivered. Literature that supports it is 605-10-S99-1, which states that \"The staff believes that delivery generally is not considered to have occurred unless the customer has taken title and assumed the risks and rewards of ownership of the products specified in the customer's purchase order or sales agreement. Typically, this occurs when a product is delivered to the customer's delivery site (if the terms of the sale are "FOB destination") or when a product is shipped to the customer (if the terms are "FOB shipping point\").\" According to this standard, CoAx can recognize revenue when goods are shipped, because terms of the shipping agreement are FOB shipping point. Title to goods and risks associated with it are transferred when shipped. ASC 605-10-25-S25-1b Being earned. Paragraph 83(b) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, states that revenue is not recognized until earned. That paragraph states that an entity's revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. That paragraph states that gains commonly result from transactions and other events that involve no earning process, and for recognizing gains, being earned is generally less significant than being realized or realizable. It supports our second alternative, because they cannot recognize revenue until it is earned. Recommendations For the first transaction, CoAx should recognize revenue before the delivery because the cables are ready for shipping, they are virtually segregated, and CoAx will not use them to fulfill other customers order. The customer has requested in a writing that the cables should store in CoAx warehouse until they finish their warehouse construction and this meets requirements of ASC 606-10-55-(81-84). The three conditions established between CoAx and CableCo were: \"risks of ownership of the cable have passed to CableCo, CableCo has a substantial business purpose for requesting CoAx to hold the cable at its warehouse (waiting on completion of the warehouse), and CoAx does not have additional performance obligations with respect to the cable purchased by CableCo.\" As ASC 606-10-55-82 states: \"For some contracts, control is transferred either when the product is delivered to the customer's site or when the product is shipped, depending on the terms of the contract (including delivery and shipping terms).\" Considering that the cases specifies that CableCo and CoAx came to an agreement about the status of the cables, it is clear that recognizing the revenue before the delivery is valid. The terms are agreed upon by both parties and supported by the codification. The second alternative would not work best simply due to the fact that the agreed upon terms by both parties about ownership transfer and policies. One could look at the fact that custodial duties were not explicitly talked about concerning the storage of the cable at CoAx's facilities and it might be used to justify the second alternative alongside the idea of conservatism that ASC 605-10-05-4 supports, however, once again, the agreed upon terms change the conditions upon which the revenue can be recognized and further supports alternative one. For the second transaction CoAx should recognize revenue at the transfer of the inventory to the carrier because according to the contract it is FOB shipping point, this means title transfers to TeleCo at the shipping point and sale of the inventory has been made. Revenue is earned at the shipping point because the transaction is completed. According to the terms set by both CoAx and TeleCo: CoAx completes its end of the agreement once it delivers the goods to the FOB Shipping point. According to the codification ASC 605-10S99-1, the revenue is not to be recognized until responsibility for the goods is reasonably transferred to the customer. As per the agreement between the two companies, responsibility does become transferred to TeleCo at the FOB Shipping point. The other alternative to not recognize revenue till the very end of the transaction could be supported by ASC 605-10-25-S25-1b. One might also conclude that because the shipping company is a subsidiary owned by CoAx that the responsibility of the goods remains in CoAx's arms and should also remain on their books and not recognize the revenue. However, as the two companies verbally/in writing agreed to the terms that despite the shipping company's ownership, the responsibility of the good once at the FOB Shipping point belongs to TeleCo. So in summary, not recording the revenue once at FOB Shipping point is not the best recommendation/course of action