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I need help with the problem attached over revenue recognition and refunds.

1/24/2017 Assignments 91067 2017 Cambridge Business Publishers | For the Personal Use of Jessica Reyna | Unauthorized Reproduction of this Work is Illegal. chAPter 6 | Reporting and Analyzing Revenues and Receivables 309 CASES AND PROJECTS C6-47. Revenue Recognition and Refunds Groupon, Inc. is an internet-based marketing company which sells coupons (called \"Groupons\") for products and services offered by other merchants (merchant partners). Groupon offers a \"daily deal\" to subscribers. The daily deal provides significant savings on a variety of products and services provided that a minimum number of customers purchase the Groupon for each deal offered. This feature guarantees a sufficient volume of customers to ensure that the deal is profitable to the merchant partner. When Groupon sells a coupon, it collects the proceeds from the customer (gross billings) and then remits a payment to the merchant partner. These payments are typically paid out over a 60 day period. Groupon's revenue recognition policy is described in its 10-K as follows: LO1, 2 GROUPON, INC. NASDAQ :: GRPN Revenue Recognition The Company recognizes revenue from Groupons when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the selling price is fixed or determinable; and collectability is reasonably assured. These criteria are met when the number of customers who purchase the daily deal exceeds the predetermined threshold, the Groupon has been electronically delivered to the purchaser and a listing of Groupons sold has been made available to the merchant. At that time, the Company's obligations to the merchant, for which it is serving as an agent, are substantially complete. The Company's remaining obligations, which are limited to remitting payment to the merchant and continuing to make available on the Company's website the listing of Groupons previously provided to the merchant, are inconsequential or perfunctory. The Company records the net amount it retains from the sale of Groupons after paying an agreed upon percentage of the purchase price to the featured merchant excluding any applicable taxes. Revenue is recorded on a net basis because the Company is acting as an agent of the merchant in the transaction. Groupon reported gross billings of $3,985.5 million in 2011, up from $745.3 million in 2010. Its net revenues were $1,610.4 million in 2011 and $312.9 million in 2010. Groupon also reported that it changed its method of revenue recognition during 2011: The Company restated the Condensed Consolidated Statements of Operations for the three months ended March 31, 2011, included in the Form S-1 filed with the SEC on June 2, 2011, to correct for an error in its presentation of revenue. Most significantly, the Company restated its reporting of revenues from Groupons to be net of the amounts related to merchant fees. Historically, the Company reported the gross amounts billed to its subscribers as revenue. The Condensed Consolidated Statement of Operations for the three months ended March 31, 2011, was restated to show the net amount the Company retains after paying the merchant fees. The effect of the correction resulted in a reduction of previously reported revenues and corresponding reductions in cost of revenue in those periods. The change in presentation had no effect on pre-tax loss, net loss or any per share amounts for the period. Groupon's refund policy is also described in its 2012 10-K report: Our Groupon Promise states that we will provide our customers with a refund of the purchase price of a Groupon if they believe that we have let them down. . . . Our standard agreements with our merchant partners generally limit the time period during which we may seek reimbursement for customer refunds or claims. Our customers may make claims for refunds with respect to which we are unable to seek reimbursement from revenue our merchant partners. At the time is recorded, we record an allowance for estimated customer refunds. We accrue costs associated with refunds in accrued expenses on the consolidated balance sheets. The cost of refunds where the amount payable to the merchant is recoverable is recorded in the consolidated statements of operations as a reduction to revenue. The cost of refunds when there is no amount recoverable from the merchant are presented as a cost of revenue. To determine the amount of our refund reserve, we track refund patterns of prior deals, use that data to build a model and apply that model to current deals. Further analysis of our refund activity into 2012 indicated deviations from modeled refund behavior for deals featured in late 2011, particularly due to a shift in our fourth quarter deal mix and higher price point offers. Accordingly, we updated our refund model to reflect changes in the deal mix and price point of our deals over time and we believe this updated model will enable us to more accurately track and anticipate refund behavior. Required: a. b. Assume that Groupon offers a daily deal that costs $200 per Groupon. It sells 600 of the Groupons and agrees to remit 50% of the gross revenue to the merchant within 60 days. Using journal entries and T-accounts, illustrate how Groupon would record the sale of this Groupon deal. In the first quarter of 2011, Groupon changed its revenue recognition policy. How did this change affect its income statement? https://mybusinesscourse.com/ereader/16#page/309 1/1 1/24/2017 Assignments 91067 2017 Cambridge Business Publishers | For the Personal Use of Jessica Reyna | Unauthorized Reproduction of this Work is Illegal. 310 chAPter 6 | Reporting and Analyzing Revenues and Receivables c. d. e. LO1, 2, 6 DELL INC. NASDAQ :: DELL C6-48. Refer to the facts presented in a above. Assume that Groupon expects that 10% of the Groupon customers will demand a refund within the first 60 days. How does Groupon record this estimate of returns? How are actual refunds recorded? Now assume that an additional 5% of Groupon's customers demand refunds after the first 60 days. How are these refunds handled? Given the uncertainty surrounding refunds, what alternative accounting approaches might Groupon consider for handling refunds? Interpreting Revenue Recognition Policies and Earnings Management A Wall Street Journal article dated October 31, 2007, reported that an internal investigation atDell Inc. had uncovered evidence of earnings management. The article states: An internal investigation found that senior executives and other employees manipulated the company's financial statements to give the appearance of hitting quarterly performance goals. One of the biggest problems uncovered in the investigation was the way Dell recognized revenue on software products it sells. Dell, a large reseller of other companies' software products, said it historically recognized revenue from software licenses at the time that the products were sold. . . . Based on its internal review, it should have deferred more revenue from software sales. Another issue was product warranties. In some cases, Dell said it improperly recognized revenue associated with [extended] warranties over a shorter period of time than the duration of the contract. The income statements from Dell's 2007 10-K report are presented below, along with the footnote outlining Dell's revenue recognition policies: Fiscal Year Ended February 2, 2007 February 3, 2006 As Restated January 28, 2005 As Restated Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of net revenue . . . . . . . . . . . . . . . . . . . . $57,420 47,904 $55,788 45,897 $49,121 40,103 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . 9,516 9,891 9,018 Operating expenses: Selling, general, and administrative . . . . . . . Research, development, and engineering . . 5,948 498 5,051 458 4,352 460 Total operating expenses . . . . . . . . . . . . . . . 6,446 5,509 4,812 Operating income . . . . . . . . . . . . . . . . . . . . . Investment and other income, net . . . . . . . . 3,070 275 4,382 226 4,206 197 Income before income taxes . . . . . . . . . . . . Income tax provision . . . . . . . . . . . . . . . . . . . 3,345 762 4,608 1,006 4,403 1,385 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,583 $ 3,602 $ 3,018 Revenue Recognition Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts and professional services). These products and services are sold either separately or as part of a multiple-element arrangement. Dell allocates revenue from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the relative sales price of each element when sold separately. The allocation of fair value for a multiple-element arrangement involving software is based on vendor specific objective evidence (\"VSOE\"), or in the absence of VSOE for delivered elements, the residual method. Under the residual method, Dell allocates revenue to software licenses at the inception of the license term when VSOE for all undelivered elements, such as Post Contract Customer Support (\"PCS\"), exists and all other revenue recognition criteria have been satisfied. In the absence of VSOE for undelivered elements, revenue is deferred and subsequently recognized over the term of the arrangement. For sales of extended warranties with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered elements is deferred and recorded when delivery occurs. Product revenue is recognized, net of an allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain. Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. Revenue from sales of third-party extended warranty and service contracts or software PCS, for which Dell is not obligated to perform, and for which Dell does not meet the criteria for gross revenue recognition under EITF 99-19 is recognized on a net basis. All other revenue is recognized on a gross basis. https://mybusinesscourse.com/ereader/16#page/310 1/1