Application of revenue standard: ASC 606-10-25-1, performance obligation: ASC 606-10-25-15, TRANSACTION PRICE & RECOGNITION (ASC 606-10-32-31) are these one the correct rules to use?
CASE FACTS: INFLUENCING HUB Influencing Hub (IH) is a marketing company that provides a variety of marketing offerings to its customers. Specifically: - IH will create a TV commercial for $750,000, build an app for $375,000, and build a Facebook page for $187,500. These amounts represent IH's charges for these items when IH 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 amount owed to IH is $1,125,000. Payment terms are 50 percent 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 500,000 times or more in the first month of usage, there is a one-time bonus of $187,500 payable to IH. Stanley, a customer, approaches IH with the hopes of reinventing its image to a younger customer base. Stanley has a verbal agreement with IH that is based on IH's unsigned quote to Stanley on September 30, 2022, for one TV commercial, one app, and a Facebook page for total consideration of $1,125,000 and payment terms noted above. these items can be redirected by IH to another customer. IH performed a credit check on Stanley and has determined that Stanley has the intention and ability to pay IH for fulfilling its portion of the contract. Stanley is required to pay IH for performance completed to date if Stanley cancels the contract with IH for reasons other than IH's failure to perform under the contract as promised. Stanley makes a payment on September 30,2022, in the amount of $562,500 (50\% of total consideration of $1,125,000 ) pursuant to the agreement. From the date of the quote, it takes IH 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. IH does not think that the app will be downloaded 500,000 times in the first month because Stanley's customer base does not quickly accept newly developed technology. Based on its experience with similar technology, IH has determined that it takes over three months for Stanley's users to begin to download its apps. Required IH's CFO is trying to understand the new revenue recognition model and has asked you to explain how IH would account for the above scenario under the new standard. 1. How should IH account for the above offering with Stanley under the current revenue recognition model? How much revenue can IH recognize on contract signing (9/30/2022), after two weeks (10/14/2022), in three months (12/30/2022), and in six months (March 30, 2023)? Record the relevant journal entries for these dates and use ASCs to support your arguments/conclusions. 2. How would your conclusions and journal entries in Q1 change if: a. The app sold to Stanley is actually downloaded more than 500,000 times in the first month of App usage (i.e., by January 30,2023) ? b. IH believed at the outset that there is about a 75 percent chance that the app will be downloaded more than 500,000 times and it is probable that there will not be a significant reversal of revenue? CASE FACTS: INFLUENCING HUB Influencing Hub (IH) is a marketing company that provides a variety of marketing offerings to its customers. Specifically: - IH will create a TV commercial for $750,000, build an app for $375,000, and build a Facebook page for $187,500. These amounts represent IH's charges for these items when IH 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 amount owed to IH is $1,125,000. Payment terms are 50 percent 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 500,000 times or more in the first month of usage, there is a one-time bonus of $187,500 payable to IH. Stanley, a customer, approaches IH with the hopes of reinventing its image to a younger customer base. Stanley has a verbal agreement with IH that is based on IH's unsigned quote to Stanley on September 30, 2022, for one TV commercial, one app, and a Facebook page for total consideration of $1,125,000 and payment terms noted above. these items can be redirected by IH to another customer. IH performed a credit check on Stanley and has determined that Stanley has the intention and ability to pay IH for fulfilling its portion of the contract. Stanley is required to pay IH for performance completed to date if Stanley cancels the contract with IH for reasons other than IH's failure to perform under the contract as promised. Stanley makes a payment on September 30,2022, in the amount of $562,500 (50\% of total consideration of $1,125,000 ) pursuant to the agreement. From the date of the quote, it takes IH 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. IH does not think that the app will be downloaded 500,000 times in the first month because Stanley's customer base does not quickly accept newly developed technology. Based on its experience with similar technology, IH has determined that it takes over three months for Stanley's users to begin to download its apps. Required IH's CFO is trying to understand the new revenue recognition model and has asked you to explain how IH would account for the above scenario under the new standard. 1. How should IH account for the above offering with Stanley under the current revenue recognition model? How much revenue can IH recognize on contract signing (9/30/2022), after two weeks (10/14/2022), in three months (12/30/2022), and in six months (March 30, 2023)? Record the relevant journal entries for these dates and use ASCs to support your arguments/conclusions. 2. How would your conclusions and journal entries in Q1 change if: a. The app sold to Stanley is actually downloaded more than 500,000 times in the first month of App usage (i.e., by January 30,2023) ? b. IH believed at the outset that there is about a 75 percent chance that the app will be downloaded more than 500,000 times and it is probable that there will not be a significant reversal of revenue
