Larson Industries: A Case on Identifying and Researching Revenue Recognition Issues

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• Summary
• The specific accounting issue;
• The appropriate authoritative guidance
• An analysis of the issue
• Recommendation
• Conclusion

Background:

Larson Industries:

• Larson company sells the AM300- A specialty carpentry and premium craftwork tools manufacturer
• The retail price range: $100-$350 & accessories parts $0.55-$9.95
• 30% of products to be sold through Dynamic & 20% other retailers. 50% sold directly through Larson Industries website.
• 78 % of customers purchased additional accessories via the Larson website or outlets.
• The AM300 comes with a three-year manufacturer's warranty.
• Larson also sells gift cards, can be redeemed at any factory outlet or on the website.
• The Deal with Dynamic has great potential to drastically improve sales of the AM300.

Dynamic Wholesale Inc.

• Dynamic operates a number of warehouses that offer a variety of goods to consumers.
• Well-known for its product demonstrations-30-minute infomercials for durable products that are available at their warehouses.
• Great return/exchange policy: allows customers full refunds with a valid receipt, for up to six months following sale transactions.
• The Dynamic store credit card:5% discount on purchases when paying with the card.
• Does not traditionally accept manufacturer coupons

Agreement Characteristics

• Larson Industries, the manufacturer of AM300, entered into an agreement with Dynamic Wholesale, Inc., a company that operates a number of warehouses that offer a variety of goods to customers.
• Larson agreed to sell Dynamic 1 million standard AM300's priced at $152 each which were shipped on May 15.The order total was due in full within 90 days, which gave Dynamic the opportunity to accept the shipment and place the goods on their warehouse floors by May 31.
• Dynamic also expressed interest in purchasing 1 million more units within the next year.Larson offered to reserve the additional products for Dynamic.
• Larson's accounts receivable department sent an invoice immediately to confirm Dynamic's interest in the additional product.
• A two-tiered volume discount was offered to Dynamic from Larson.If Dynamic ordered an additional 500,000 products within six months of the initial order, a 10% retroactive discount would be applied to all 1.5 million products.Any purchases in excess of 1.5 million within six months of the May 15 order would qualify for a 12% discount.
• Larson's customer service is extremely generous.The AM300 comes with a three-year manufacturer's warranty, which covers the basic functionality of the main product.The company is well-known for also replacing the included accessories, which are not covered by the warranty, at no extra charge, during the three-year warranty period for those customers who register the product.
• Larson asked Dynamic to accept all warranty claims for the AM300 at it warehouses within the first year of sale to its customers, providing a convenient option for customers experiencing problems with the product.Dynamic will send these products back to Larson, who will then reimburse Dynamic for the refund or exchange amount and shipping costs.
• Dynamic agreed to sell the AM300 for $249.99. This price included the three hardware accessories that are included in the standard AM300.
• Larson offered Dynamic price protections, stipulating that Dynamic would not offer any trade discounts to customers aside from the 5% discount they receive when they purchase items with Dynamic's credit card.
• Larson developed a $50 manufacturer's coupon for customers to redeem on Larson's website and factory outlets.Since Dynamic does not accept manufacturer's coupons,Larson agreed that the coupon would only be redeemable at Larson and at the point-of-sale at Dynamic.Larson would not honor the coupon.
• Dynamic agreed to sell Larson's gift cards, along with other retailers' gift cards at their kiosks located at Dynamic's stores. Larson agreed to a 3% commission to Dynamic on the value of the gift cards sold at Dynamic.