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PROBLEM # 1: Revenue Recognition (15 points, 1.5 points each cell) Identify when each of the following companies should recognize revenue. Use the criteria we discussed in class: for the Point of revenue. (i) before production begins, (ii) cash collection, (iii) after replacement cost are recovered, (iv) point of sale, (v) completion of product, and (vi) during production. AND Discuss any income measurement risks that could arise. Include in your discussion the criteria we used in class. i persuasive evidence of arrangement, (ii) delivery has occurred/ services have been rendered, (iii) price is fixed or determinable, (iv) collectability is assured. a. RealMonex provides investment advice to customers for an upfront fee. It provides these customers with password-protected access to its Website where customers can download investment reports. RealMoney is obligated to provide updates on its website. Boeing - airplane manufacturer whose revenue is derived largely from long-term fixed-price contracts with airlines Wells Fargo - large commercial bank that earns interest on loans d. Harley Davidson - manufactures and retails motorcycles, provides financing for dealers and customers e) Jill is an internet clothing retailer. It receives credit card payments when customers place their orders and ships products from warehouses within 5-7 business days. Point of revenue Risks a 1 . If revenue was collected at a later date, the point of sale customer could potentially download the reports and then not pay. Or, they could copy the reports and send them to others who have not paid. b 4 - boeing has had long-term contracts with these airlines, during production they have established their reliability for payment. As these contracts are executed, they are likely not all delivered/completed at once. Boeing should recognize revenue as it occurs, and as they are delivering their product, assumingly in increments. 3 - wells fargo will collect interest as it is due for each during production client/customer. Obviously this will be different for every individual account, so they will recognize interest revenue as it accumulates in each period. If they get $100 in interest due February 1st, they will recognize that on February 1st Context not specific enough for me to pick one. If a either before production begins or point of sale customer goes online and custom orders a motorcycle, builds it to their specifications etc, they pay for it before it is produced. It then will be made specifically for that customer. If a customer just walks into a retail shop and picks a motorcycle that is already made, that revenue will be recognized at the point of sale. As soon as she gets a credit card payment, she will E cash collection recognize that revenue. She then has a liability on her hands and is obligated to provide that good to her customer(s)
