Bugsy employs thousands of door-to-door reps who sell pest control nationwide. Bugsy provides year-round pest control services using its own employees and equipment. Customers typically sign up for a new one-year contract for an average price of $480. Customers pay $100 at contract signing, which includes a nonrefundable activation fee of $60 and the first monthly charge of $40. The $60 upfront fee helps offset Bugsy’s cost of setting up a new customer and paying its sales reps. If a customer chooses to renew for an additional year, the customer pays the currently prevailing monthly rate, which has not increased from $40/month for a number of years. The customer can cancel at any time, but cannot receive a refund for the upfront activation fee. Contract terms call for a single monthly visit to perform pest control services with payment of the monthly fee to the Bugsy representative upon completion of the work.

Sales reps receive a $100 (18.5% = $100/($60 + [$40 x 12])) sales commission in the first year a customer signs up with Bugsy. Sales reps receive a $40 (8.3% = $40/[$40 x 12]) sales commission in any year that their original customer renews. Sales reps are encouraged to reach out to existing customers regularly to maintain a good relationship and obtain feedback on ways the company can improve. As a result of these efforts, 70 percent of customers in a given year renew for an additional year. On average, customers stay with Bugsy for 3.5 years.

At the beginning of 2020 Bugsy sales reps delivered 10,000 new contracts.

Bugsy has hired your firm to assist in understanding the implications of the new revenue recognition guidance on accounting for all aspects of the transaction described above. Your answers to each question below should be supported by relevant guidance and by the case facts.

Case questions and requirements

1. Does the arrangement between Bugsy and its customers meet the identifying criteria required for a contract accounted for under the guidance in ASC 606-10?
2. Use the case facts to identify the activities included in the arrangement and determine if each identified activity represents a promised good or service under ASC 606-10 and if so, does each identified promised good or service represent a separate performance obligation?
3. Which cash flows should be considered when determining the transaction price of the Bugsy arrangement?
4. Determine the transaction price in accordance with ASC 606-10.
5. The case indicates that 10,000 contracts were signed at the beginning of 2020. Use the case facts to establish the expected number of contracts to be renewed each year across the life of the arrangement.
6. Determine the total transaction price to be allocated across the performance obligations you identified in question 2 above, in accordance with ASC 606-10, using the relative standalone price approach.
7. Determine the total transaction price to be allocated across the performance obligations you identified in question 2 above, in accordance with ASC 606-10, using the alternative approach described in ASC-606-10-55-45
8. Determine if revenues for each performance obligation should be recognized over time or at a point in time and prepare annual entries to reflect the Bugsy arrangement in accordance with ASC 606-10, using both approaches.