Question:

a. Prepare a budget of expected minimum revenues under the contract. Show the

sources of revenues from the set of five films and the fee.

b. What are the general revenue recognition criteria established under Generally

Accepted Accounting Principles (GAAP)

c. How would you apply the GAAP criteria for revenue recognition to account for the

revenues under this contract? Explain your logic for both realizable and earned.

d. Using the logic you developed in part c, calculate the revenue that VIP Motion

should report for the set of five films for the year ended 12/31/2006.

e. For the year ended 12/31/2006, prepare a schedule that shows the cash flows

received from PlexMedia from the contract.

f. Why do cash flows and revenues recognized differ, if they differ under your

calculations?

Background:

Agreement:

Tri-Pictures is granted the right, license, and permission to display the five films listed herein during the contract period. In consideration of this contract, XM Films will receive:

1. $5,000,000, payable

$2,500,000 upon contract signature and

$2,500,000 on September 1, 2006.

2. $500 for each film showing in each location.

Contract period: The contract period shall be the six months commencing on September 1, 2006.

Limitation on screenings: Tri-Pictures agrees to show Super Fighters no more than 42 times per theater and the four accompanying films (SF II, SF III, SF IV and SF V) no fewer than 18 times each per theater.

Exclusivity: Tri-Pictures shall have exclusive screening rights during the contract period. XM Films acknowledges that an integral inducement in consideration of the contract is Tri-Pictures's interest in being the sole source, without competition from other theaters in the market, during the contract period.

At the signing of the contract, Tri-Pictures paid $2,500,000 of the $5,000,000.

Tri-Pictures sent checks to XM Films for $2,500,000 on September 1,2006, and $5,462,500 on January 20, 2007, along with an audited statement detailing the number of showings as of December 31, 2006. The following is a summary of that information:

Film# of ShowingAmount Due

Super Fighters 8,550 $4,275,000

SF II-V 2,375 $1,187,500

Total: 10,925 $5,462,500

In March 2007, XM FIlms received a demand notice from Tri-Pictures that all monies previously paid were to be returned or they would file a lawsuit. In their letter, they enclosed a newspaper clipping from a movie theatre in Toronto, Canada that was advertising the set of five films for showing the second week of February 2007.