CASE FACTS: PURE INSPIRATIONS

Pure Inspirations $($PI$)$ is a marketing company that provides a variety of marketing offerings to its customers.

Specifically:

PI will create a TV commercial for $$250,000,$ build an app for $$25,875,$ and build a Facebook page for

$$11,625.$ These amounts represent PI's charges for these items when PI 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 PI is $$280,000.$

Payment terms are $40$ percent due at contract signing, with the remaining $60$ percent due over the rest of

the development period $(35$ percent at mid$-$point, $25$ percent at completion$).$

If the app is downloaded $50,000$ times or more in the first month of usage, there is a one$-$time bonus of

$$10,500$ payable to $\frac{?}{PI}.$

John $K,$ a customer, approaches PI with the hopes of reinventing its image to a younger customer base. John $K$ has

a verbal agreement with PI that is based on PI's unsigned quote to John K on August $1,2023,$ for one TV

commercial, one app, and a Facebook page for total consideration of $$280,000$ and payment terms noted above.

The agreement creates enforceable rights and obligations pursuant to PI's customary business practices. None of

these items can be redirected by PI to another customer. PI performed a credit check on John K and has determined

that John $K$ has the intention and ability to pay PI for fulfilling its portion of the contract. John $K$ is required to pay

PI for performance completed to date if John K cancels the contract with PI for reasons other than PI's failure to

perform under the contract as promised.

John K makes a payment on August $1,2023,$ in the amount of $$112,000(40\%$ of total consideration of $$280,000$

pursuant to the agreement. From the date of the quote, it takes PI six months to develop and produce the TV

commercial, three weeks to complete the Facebook page, and four months to design and complete a fully

functioning app. PI does not think that the app will be downloaded $50,000$ times in the first month because John

K$\text{'}$s customer base does not quickly accept newly developed technology. Based on its experience with similar

technology, PI has determined that it takes over three months for John K$\text{'}$s users to begin to download its apps.

Required

PI's CFO is trying to understand the current revenue recognition model and has asked you to explain how PI

would account for the above scenario under the current standard. PI's fiscal year$-$end is July $31.$ You need to find

theoretical support $($the Accounting Standard Codes, or ASCs$)$ from the codification system to convince the CFO

that you have thoroughly analyzed all five steps of revenue recognition.

How should PI account for the above offering with John K$?$ Record all relevant journal entries. How much

revenue can PI recognize on contract signing $(8/1/2023),$ after three weeks $(\frac{8}{22}\frac{?}{2023}),$ in four months

$(\frac{11}{30}\frac{?}{2023}),$ and in six months $(1/31/2024)?$ Use relevant ASCs to support your arguments$/$conclusions$.$

How would your conclusions and journal entries in Question $1$ change if:

a$.$ The app sold to John $K$ is actually downloaded more than $50,000$ times in the first month of App usage

$($i$.$e$.,$ by December $31,2023)?$ PI suspects that this success is largely due to the clever design of the App as

well as the success of the TV commercial and the Facebook page.

b$.$ PI believed at the start of the contract that there is about an $80$ percent chance that the app will be

downloaded more than $50,000$ times and it is probable that there will not be a significant reversal of

revenue? Use both the expected revenue and the mostly likely value approaches to answer this question.

Find appropriate ASCs from the codification system to support your usage of these approaches.