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Required:

1. In general, evaluate Caltron?s revenue recognition policy and the quality of Caltron?s earnings.
2. Discuss how and why Peale, Gower & Quill should recommend that Caltron account for and report the four transactions in the fourth quarter of 20x1. Include in your discussion specific reference to bill and hold arrangements and accounting pronouncements that you used to formulate the basis of your recommendation.

Caltron Computers Caltron Computers, Inc. Caltron Computers is a publicly held company with a total market capitalization in excess of $450 million. Caltron manufactures minicomputer systems that are designed to achieve the power of a mainframe at a fraction of the cost. The minicomputers are Unix-based and use multiple Intel Pentium chips. Caltron generally recognizes revenue when minicomputers are shipped. During the fourth quarter of 20x1, Caltron recognized revenue from four transactions that were questioned by its auditors, Peale, Gower & Quill. The auditors are concerned not only about the impact that these transactions will have on 20x1 reported earnings but the impact on Caltron's proposed secondary public stock offering in early February 20x2. The first transaction involved the recognition of $400,000 of revenue on two systems shipped to Elegant Housing, Inc. on a trial basis for six months. Elegant paid Caltron $20,000 at the time of shipment, November 15, 20x1, which would be applied to the purchase price if Elegant accept the systems or forfeited if Elegant returns the systems. Preliminary reports from Elegant are that they are quite satisfied with the systems. The second transaction involved the recognition of $250,000 of revenue on a system not shipped as of December 31, 20x1, under a bill and hold arrangement with Alation Electronics. Alation paid $175,000 to Caltron on December 15, 20x1, and requested Caltron to hold the system for shipment until the first quarter of 20x2. Once Alation notified Caltron where to ship the system, it would pay the $75,00 balance due in 20x2. The third transaction also involved a bill and hold arrangement with BTO Computer Leasing, a lessor of computer equipment. On November 1, 20x1, BTO ordered five systems from Caltron and paid $190,000 down, on the condition that Caltron would hold the systems at its warehouse and assist BTO in finding lessees for the systems. Caltron recognized $950,000 of revenue in 20x1 on the BTO transactions. As of December 31, 20x1, Caltron identified an end user to lease one of the systems from BTO. The lease terms were still being negotiated between BTO and the end user. The last transaction involved the fourth quarter 20x1 recognition of $220,000 of revenue and a related $110,000 allowance for sales returns for a system shipped to Harvey Industries on a trial basis for four months. The system was shipped to Harvey on November 27, 20x1, and Harvey paid 50 percent of the purchase price at that time. If Harvey accepts the system, its down payment of $110,000 less any shipping costs would be returned. Caltron had previously entered into two similar transactions with Harvey. On one occasion Harvey purchased the system, and the other time Harvey returned the system. Based on these previous results, Caltron recorded the $110,000 allowance for sales returns. Required: 1. In general, evaluate Caltron's revenue recognition policy and the quality of Caltron's earnings. 2. Discuss how and why Peale, Gower & Quill should recommend that Caltron account for and report the four transactions in the fourth quarter of 20x1. Include in your discussion specific reference to bill and hold arrangements and accounting pronouncements that you used to formulate the basis of your recommendation. Preparing Case Analyses Unless otherwise instructed, cases and assignments may be prepared in either \"Memo\" or \"Report\" form. Memo Form If you prepare your case in Memo form, you should assume that the recipient of your memo will be your audit supervisor (audit viewpoint) or the controller of your organization (financial viewpoint.) In either case, your memo should include the following: Date: To: From: Subject: Due date of the assignment Audit Supervisor OR Controller (you must designate one) Your Name A subject for your memo. (Your subject will NOT be \"Case xyz\" or any other subject that implies a college project. Your subject should reflect your research efforts.) Body: The body should contain the following parts: Background: A brief description/summary of the problem. Problem: A statement of the problem/issue/question. Remember to address the problem/issue/question from the perspective (auditor or financial) you have chosen. Relevant Guidance: A statement listing the professional guidance used in your research. This must be cited as noted in the \"Codification\" or as noted for SEC documents. No other citation is allowed. For example, you cannot cite \"FASB xyz\" or \"SFAS xyz.\" You MUST use the cite method indicated by the FASB for codification. This section is simply a listing of the guidance used. Application: This section explains how the guidance cited relates directly or indirectly to the issue at hand. This is NOT simply copying relevant sections of the professional guidance. This IS reading the professional guidance and indicating in your own words (to the extent possible) how that guidance relates to the issue at hand. Be sure that you use your own words as much as possible. If you do not use your own words, you must enclose the material in quotes. In all cases, your MUST PROVIDE CITE REFERENCE (FASB CODIFICATION) FOR ANY PROFESSIONAL GUIDANCE USED IN YOUR MEMO.) This is true whether you summarize in your own words or quote directly. NOTE: If I cannot find your reference using the cite in your paper, then you have an invalid cite and will be graded accordingly. Conclusion: State your conclusion with respect to the case. In this section, you can state your opinion by indicating \"in my opinion\" xyz. You cannot have an opinion in this memo except in this section and only if it is clearly indicated as opinion. Of course, your conclusion will be your opinion, so you should state, for example, \"In my opinion Company XYZ should account for xyz using the guidance in xyz as follows .... In all cases, this section will explain the accounting treatment you recommend for the issue/question/problem you raise and in all cases the recommendation will be noted as your recommendation. Report Form If you prepare your case in Report form, you should assume that the recipient of your memo will be your audit supervisor (audit viewpoint) or the controller of your organization (financial viewpoint.) Case Analyses presented in report form should conform to the \"standard\" conventions for reports with respect to headers, sections, bibliographies (required in reports), and citations. Your report should consist of the following: Title: Give your report a title. This should NOT be the name of the case. Prepared For: Indicate who you have prepared the report for. This will be either \"Audit Supervisor\" or \"Controller.\" Prepared By: This will be your name. NOTE: The above title and authorship information should be placed on the first page of the report, not on a separate title page. DO NOT include a separate title page. The following sections should be included in the report: Introduction: Explain the problem/question/issue. Remember your viewpoint when explaining the problem/question/issue. Body: Include the same sections as noted for the \"Memo Form,\" above. Bibliography: A listing of the professional guidance used in your report with complete cite references