Context

Case:

Top Promotions (TP) is a marketing company that offers a variety of offerings to its customers. Specifically:

TP will create a TV commercial for $1,000,000, build an app for $500,000, and build an Instagram account for $250,000. These amounts represent TP's charges for these items when TP sells them separately to customers. The TV commercial, the app, and the Instagram account are not interrelated; that is, each functions independently of the other offerings.

If a customer purchases all aforementioned items together, the total cost is $1,500,000.

Payment terms are 50% consideration due at contract signing, with the remaining 50% due over the rest of the development period (25% at mid-point, 25% at completion). If the three items are purchased together, the development period is equal to the time it takes for

the longest item to be completed.

If the app is downloaded at least 500,000 times in the first month that it is live, there is a

one-time bonus of $100,000 payable to TP.

Fountain, a customer, approaches TP about building a marketing campaign to reach a younger customer base. Fountain has a verbal agreement with TP that is based on TP's unsigned quote to Fountain on November 30, 2020, for one TV commercial, one app, and an Instagram account. The agreement creates enforceable rights and obligations pursuant to TP's customary business practices, which includes payment for performance completed to date if Fountain cancels the contract for any reason other than TP's failure to perform under the contract as promised. None of these items can be redirected by TP to another customer. TP performed a credit check on Fountain and has determined that Fountain has the intention and ability to pay TP for fulfilling its portion of the contract.

Fountain makes a payment on November 30, 2020, in the amount of $750,000 pursuant to the agreement. From the date of the quote, it takes TP six months to develop and produce the TV commercial, three months to complete a fully functioning app, and two weeks to complete the Instagram account. At the fiscal year end, TP is on target with this production schedule. TP does not think that the app will be downloaded 500,000 times in the first month because Fountain's customer base does not quickly accept newly developed technology.

According to ASC 606-10-25-23 and 25-24, a business should recognize revenue when (or as) it satisfies the performance obligations and must determine at contract inception whether it satisfies the performance obligations over time or at a point in time. For all performance obligations, TP decided at the time of the contract that it should not recognize revenue until each obligation is complete (i.e., the performance obligation is satisfied at a point in time).

You are on an engagement team that is auditing the balance sheets of TP as of December 31, 2020 (TP's fiscal year end), and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. TP produces its financial statements in accordance with the U.S. generally accepted accounting principles.

For the contract between TP and Fountain, what are some risks of material misstatement (RMMs) that we may identify as part of our audit? On the "Activity 2" tab of the Excel spreadsheet, columns A and B contain a RMMs matrix. In column C, identify if the RMM is a relevant RMM for the contract between TP and Fountain. In column D, describe why (or why not) the RMM is (or is not) relevant.

RMM No.	RMM Description	Applicable to Contract Between TP and Fountain?	Why or Why Not?
1	Contract modifications are not identified and accounted for correctly.
2	All promised goods or services in the contract are not distinct, causing revenue to be recorded in the wrong period.
3	Revenue is inappropriately recognized for consignment sales before transfer of control has occurred in accordance with the contract terms.
4	The transaction price has not been allocated to performance obligations on a relative stand-alone selling price basis.
5	The fixed consideration identified in the transaction price of the contract is identified at the incorrect amount or does not meet the definition of fixed consideration.
6	Revenue is recognized when a contract (as defined by ASC 606-10-25-1) does not exist.
7	The amount of variable consideration is recorded at an incorrect amount.
8	Service-type warranties are not appropriately identified as separate performance obligations.
9	Licensing arrangements when the entity receives consideration from a customer (e.g., in the form of a sales- or usage-based royalty) are recorded incorrectly.