Presented below are two situations that have arisen in the past few years where the correct accounting treatment was not clear. Consider each and describe how you think it should be accounted for. Note that there may be more than one justifiable accounting treatment. You will be graded not only on your proposed accounting treatment, but also on how you justify it using content from class or (if you choose) additional online resources.

I. Virtual Goods

Global spending on mobile games is expected to surpass $100 billion in 2020 (compare that to the $64 billion spent on toilet paper in 2019). Many of these games are offered free, with options to purchase virtual goods or other premium content (i.e., freemium games). However, it is not always clear when mobile gaming companies should recognize revenue for purchases of virtual goods.

Abstergo Industries is a mobile game company that offers its Wizard Warriors game free to customers but charges for magic spells that can be used in the game. A set of three magic spells costs $6. Customers can use each of the three spells once at any time they choose.

Answer the following questions, and justify your answers by referring to revenue recognition guidelines that we discussed in class. Limit your answers to no more than a few sentences.

1. When should Abstergo recognize revenue for a sale of a set of three magic spells?

a. When the customer pays for the spells?