Helen Roberts is reviewing two transactions recorded by her client, Biotechnologies $($Biotech$),$ as part of her accounting firm$$s annual audit of the client for the December $31,2021,$ financial statements. She knows Biotech is under pressure to maximize revenues for the year and reverse three years of losses. The reported revenue on its financial statements is $$5\mathrm{.}0$ million. The amount of revenue from two transactions being reviewed is $$1\mathrm{.}0$ million. Biotech lost $$2\mathrm{.}0$ million during the last two years. If the revenue can be recorded at the $$5\mathrm{.}0$ million level, Biotech would cover the losses for the past two years and be profitable for $2021.$

Biotechnologies develops vaccines for infectious diseases like COVID$-19.$ The company was formed following the outbreak of the virus. While it$$s not working on a vaccine for COVID, the company hopes to develop therapeutics to fight similar infections in the future. Biotech went public in $2019$ and its stock is listed on Nasdaq.

Helen Roberts is one of five partners in the firm of Morton & Best, LLC$.$ Even though Biotech is its only public client, the firm is obligated to register with the PCAOB.

The fees earned from Biotech make up one$-$third of the firm$$s total revenue from fees. As a result, it$$s an important client for the firm.

Accounting Transactions

Sales to Distributor $1$ on December $27,2021$

On December $27,2021,$ Biotech sent Distributor $1$ revised terms of a deal between Biotech and the Distributor. Under the revised terms, in order for the Distributor to receive a product they ordered and wanted, it would have to place an order for another product in inventory so that Biotech is able to record the $$600,000$ revenue on that product in $2021.$ Biotech expects the distributor to place the $$600,000$ order for this product that could be shipped by December $31,2021.$

The arrangement with Distributor $1$ was developed because Biotech could not ship the specific product ordered by the Distributor by year$-$end as desired by the Distributor. That is why Biotech identified products in its inventory that it could ship by year$-$end so that it could record the revenue in $2021.$ Even though the Distributor didn$$t order or want that product, it agreed to go through with the arrangement because Biotech$$s agreement included a provision that the Distributor could return the unwanted product in the first quarter of $2022$ and replace it with the product desired. The purchase order was changed to reflect the new arrangement.

Sales to Distributor $2$ on December $30,2021$

An order for the purchase of $$400,000$ product of Biotech on December $1,2021$ by Distributor $2$ contained the terms of payment as net $30$ days or due by December $31,2021.$ The product was to be shipped on December $20,2021.$ Distributor $2$ informed Biotech that because it was a start$-$up company, it wouldn$$t be able to pay by that date and maybe for at least $60$ days thereafter. Biotech then came up with an arrangement whereby Distributor $2$ could return the product anytime during the $60-$day period, with no questions asked, and be credited for its account payable. Distributor $2$ agreed to buy the product based on these terms and Biotech recorded the $$400,000$ as revenue on December $20,2021,$ the shipping date.

Biotech$$s Arguments for Recording the Revenue in Fiscal Year$-$End December $31,2021$

The CFO of Biotech explained why revenue should be recorded on the sale of product to both distributors as follows. Revenue from the product shipped to Distributor $1$ by year$-$end could be recognized on the shipping date. The fact that the Distributor could return it next year was nothing new. The sale of any product to a customer could be returned after purchase.

The product shipped to Distributor $2$ occurred on December $20,2021,$ before year$-$end, so revenue could be recorded on that date. The fact that the distributor could return the product in $2022$ is nothing new. The sale of any product to a customer could be returned after purchase. The fact that the return would be credited with no questions asked was standard company policy.

Helen Roberts is preparing to meet with the CFO of Biotech to discuss these transactions and the way revenue has been recognized. Answer the following questions to help her prepare for the meeting.

Analyze the transactions with both distributors with respect to revenue recognition and how the CFO explained the position of Biotech. Was revenue recognized properly under GAAP? Why or why not?