Revenue recognition Heavenly Tours General background: Heavenly Tours (HT) was the brainchild of four college friends: Bart, Ava, Carla and Dave. They wanted to create a one-stop, high-touch, discounted tour experience for visitors to two local theme parks. Park Survival provides various simulated survival experiences. Park Adrenaline provides numerous adventures guaranteed to provide visitors with adrenaline rushes. Bart is responsible for managing the relationship with both parks and obtaining discounted admissions for HT's customers. Ava is responsible for the tour guides, who help customize the experience for visitors. Carla is responsible for working with high-end restaurants in the area surrounding the parks to obtain discounts on food and beverages. Dave is responsible for merchandise, which can be sold to HT's customers. Historically, HT has reported all cash collected as revenue. A private investor is requesting financial information prepared in accordance with generally accepted accounting principles before investing in HT. The investor has indicated a particular interest in HT's total revenues. The four friends are meeting with their local accountant to discuss next steps. The accountant informs them they will need to analyze each revenue stream to determine whether HT is acting as a principal or an agent. The accountant states this determination is necessary for proper accounting treatment because when a principal satisfies a performance obligation, the gross amount of consideration is recorded as revenue; however, when an agent satisfies a performance obligation, only the amount of the fee or commission earned is recorded as revenue. Part : Background: The accountant asked Bart to explain the relationship with both parks. Bart explained that he had been able to obtain a 15% discount from Park Survival. HT customers can access Park Survival's website and use a discount password provided by HT. Under this agreement, HT's customers are charged 90% of the full entrance price on their credit card when their order is accepted on Park Survival's website. Once the order is processed on Park Survival's website, the customer is given a pass that can be used for entrance to Park Survival and 5% is remitted to HT. The negotiations with Park Adrenaline had been more difficult because it was a newer park and in need of cash. Accordingly, HT purchased 100 passes for 90% of the face value. These passes are good for one year from the date of purchase. Any passes that are not used during the year would simply expire. HT has obtained the right to each pass purchased to provide the pass holder with access to the park. HT is free to sell these passes to its customers at any price, as long it doesn't exceed the face value of the pass. The customer pays an agreed-upon amount when an order is accepted on HT's website. Park Adrenaline retained the full responsibility for fulfilling its obligation to customers who entered the park with a pass purchased from HT. Requirements: Read ASC 606-10-55-36 through 40 in ASC 606, Revenue from Contracts with Customers, discussing implementation guidance for principal versus agent determination. Review the examples in ASC 606-10-55-316 through 334F. For each park, determine if HT is a principal or an agent and, accordingly, how the revenue should be recorded. Provide a thorough explanation of your conclusions. Part II: Background: The accountant then asked Ava to describe the customized tour guide services provided by HT. HT offers two types of tour services: Virtual VIP and Live VIP. These services are available only to customers who have already purchased a park pass from HT. For Virtual VIP tours, virtual tour guides and hourly HT employees meet with customers through a web- based server when they indicate their interest in a planned experience. For this planned experience service, the guides provide customers with a general description of the parks and help them determine what experience they might be interested in. If the customer accepts the service, they pay an additional $50 fee online by credit card. For Live VIP tours, a guide actually attends the park with the customer. This service is typically of interest to large groups and the service is arranged through a direct conversation with HT's customer service. These guides are contract employees who undergo vigorous training by HT and are employed as needed. The guides are paid $200 per day for each day they are contracted to provide guide services, even if the group does not show up for the experience. HT guarantees the satisfaction of its customers using the Live VIP service. HT charges $200 per day plus $10 per person, based on the actual headcount on the day of the Live VIP experience. HT has a representative collect the money due on the day of the experience. Requirements: Read ASC 606-10-55-36 through 40 in ASC 606, Revenue from Contracts with Customers, discussing implementation guidance for principal versus agent determination. Review the examples in ASC 606-10-55-316 through 334F. For Virtual VIP and Live VIP tour services, determine if HT is a principal or an agent and, accordingly, how the revenue should be recorded. Provide a thorough explanation of your conclusions. Part III: Background: The accountant then asked Carla to explain the restaurant discount program. Carla explained that HT wanted its customers to have a great experience so it would lead to repeat business and referrals. Customers typically stay in the local area surrounding the parks and are interested in the best options for their meals. By working jointly with local restaurants, HT is able to offer $100 gift certificates at a cost of $80 to HT's customers. HT does not purchase or commit itself to purchase any gift certificates in advance of its sale to a customer. HT customers are able to purchase these nonrefundable gift certificates directly from HT's website using their credit cards. Once the credit card charge of $80 clears, HT then purchases a $100 gift certificate from the customer's designated restaurant. HT remits $75 to the participating restaurant and retains $5. The restaurant is responsible for fulfilling obligations associated with the gift certificate, including remedies for customer complaints. HT has no further obligation to its customer. Carla also explained she was able to purchase 20 weeklong memberships to the Adventurers' Club, a very exclusive restaurant. A membership allows the holder unlimited dining during any one-week period in the current year at the Adventurers' Club. HT purchased these memberships at a cost of $300 each, and while it has discretion over the selling price, it is currently offering them to its customers for $500. The primary targets of these memberships are corporations. A membership card good for one week during the customer's stay is issued upon receipt of the $500. Any memberships not sold during the current year will expire and have no future value. Requirements: Read ASC 606-10-55-36 through 40 in ASC 606, Revenue from Contracts with Customers, discussing implementation guidance for the principal versus agent determination. Review the examples in ASC 606-10-55-316 through 334F. Determine if HT is a principal or an agent for the gift certificates and the Adventurers' Club membership and, accordingly, how these revenues should be recorded. Provide a thorough explanation of your conclusions. Part IV: Background: The accountant then asked David to explain the merchandising program. David explained there are two primary merchandise programs. The first one has customized HT T-shirts that sell for $40 each. These typically would include a picture of the customer and the date and the specific adventure the customer participated in. The second program provides the sale of sweat shirts and hats from both Park Survival and Park Adrenaline. The agreements with the two parks are slightly different. Park Survival has a salesperson on- site at HT's location who manages the sales and inventory. The agreement with Park Survival requires its sweat shirts to be sold for $50 and its hats be sold for $20. When a sale of Park Survival's merchandise occurs, 60% of the sales price is remitted back to Park Survival. Park Survival has retained the ownership of its inventory and the risk for loss or stolen merchandise. Any flawed or damaged merchandise will be replaced by Park Survival. The agreement with Park Adrenaline states that HT can set the selling price, but the higher of $30 for sweat shirts and $10 for hats or 60% of the actual selling price must be remitted to Park Adrenaline. Additionally, HT has assumed the risk of any loss or stolen merchandise. HT is also responsible for returns if the customer does return the merchandise. Requirements: Read ASC 606-10-55-36 through 40 in ASC 606, Revenue from Contracts with Customers, discussing implementation guidance for the principal versus agent determination. Review the examples in ASC 606-10-55-316 through 334F. Determine if HT is acting as a principal or an agent for the sale of customized HT T-shirts, Park Survival sweat shirts and hats, and Park Adrenaline sweat shirts and hats and, accordingly, the amount of revenue that should be recorded. Provide a thorough explanation of your conclusions. Revenue recognition Heavenly Tours General background: Heavenly Tours (HT) was the brainchild of four college friends: Bart, Ava, Carla and Dave. They wanted to create a one-stop, high-touch, discounted tour experience for visitors to two local theme parks. Park Survival provides various simulated survival experiences. Park Adrenaline provides numerous adventures guaranteed to provide visitors with adrenaline rushes. Bart is responsible for managing the relationship with both parks and obtaining discounted admissions for HT's customers. Ava is responsible for the tour guides, who help customize the experience for visitors. Carla is responsible for working with high-end restaurants in the area surrounding the parks to obtain discounts on food and beverages. Dave is responsible for merchandise, which can be sold to HT's customers. Historically, HT has reported all cash collected as revenue. A private investor is requesting financial information prepared in accordance with generally accepted accounting principles before investing in HT. The investor has indicated a particular interest in HT's total revenues. The four friends are meeting with their local accountant to discuss next steps. The accountant informs them they will need to analyze each revenue stream to determine whether HT is acting as a principal or an agent. The accountant states this determination is necessary for proper accounting treatment because when a principal satisfies a performance obligation, the gross amount of consideration is recorded as revenue; however, when an agent satisfies a performance obligation, only the amount of the fee or commission earned is recorded as revenue. Part : Background: The accountant asked Bart to explain the relationship with both parks. Bart explained that he had been able to obtain a 15% discount from Park Survival. HT customers can access Park Survival's website and use a discount password provided by HT. Under this agreement, HT's customers are charged 90% of the full entrance price on their credit card when their order is accepted on Park Survival's website. Once the order is processed on Park Survival's website, the customer is given a pass that can be used for entrance to Park Survival and 5% is remitted to HT. The negotiations with Park Adrenaline had been more difficult because it was a newer park and in need of cash. Accordingly, HT purchased 100 passes for 90% of the face value. These passes are good for one year from the date of purchase. Any passes that are not used during the year would simply expire. HT has obtained the right to each pass purchased to provide the pass holder with access to the park. HT is free to sell these passes to its customers at any price, as long it doesn't exceed the face value of the pass. The customer pays an agreed-upon amount when an order is accepted on HT's website. Park Adrenaline retained the full responsibility for fulfilling its obligation to customers who entered the park with a pass purchased from HT. Requirements: Read ASC 606-10-55-36 through 40 in ASC 606, Revenue from Contracts with Customers, discussing implementation guidance for principal versus agent determination. Review the examples in ASC 606-10-55-316 through 334F. For each park, determine if HT is a principal or an agent and, accordingly, how the revenue should be recorded. Provide a thorough explanation of your conclusions. Part II: Background: The accountant then asked Ava to describe the customized tour guide services provided by HT. HT offers two types of tour services: Virtual VIP and Live VIP. These services are available only to customers who have already purchased a park pass from HT. For Virtual VIP tours, virtual tour guides and hourly HT employees meet with customers through a web- based server when they indicate their interest in a planned experience. For this planned experience service, the guides provide customers with a general description of the parks and help them determine what experience they might be interested in. If the customer accepts the service, they pay an additional $50 fee online by credit card. For Live VIP tours, a guide actually attends the park with the customer. This service is typically of interest to large groups and the service is arranged through a direct conversation with HT's customer service. These guides are contract employees who undergo vigorous training by HT and are employed as needed. The guides are paid $200 per day for each day they are contracted to provide guide services, even if the group does not show up for the experience. HT guarantees the satisfaction of its customers using the Live VIP service. HT charges $200 per day plus $10 per person, based on the actual headcount on the day of the Live VIP experience. HT has a representative collect the money due on the day of the experience. Requirements: Read ASC 606-10-55-36 through 40 in ASC 606, Revenue from Contracts with Customers, discussing implementation guidance for principal versus agent determination. Review the examples in ASC 606-10-55-316 through 334F. For Virtual VIP and Live VIP tour services, determine if HT is a principal or an agent and, accordingly, how the revenue should be recorded. Provide a thorough explanation of your conclusions. Part III: Background: The accountant then asked Carla to explain the restaurant discount program. Carla explained that HT wanted its customers to have a great experience so it would lead to repeat business and referrals. Customers typically stay in the local area surrounding the parks and are interested in the best options for their meals. By working jointly with local restaurants, HT is able to offer $100 gift certificates at a cost of $80 to HT's customers. HT does not purchase or commit itself to purchase any gift certificates in advance of its sale to a customer. HT customers are able to purchase these nonrefundable gift certificates directly from HT's website using their credit cards. Once the credit card charge of $80 clears, HT then purchases a $100 gift certificate from the customer's designated restaurant. HT remits $75 to the participating restaurant and retains $5. The restaurant is responsible for fulfilling obligations associated with the gift certificate, including remedies for customer complaints. HT has no further obligation to its customer. Carla also explained she was able to purchase 20 weeklong memberships to the Adventurers' Club, a very exclusive restaurant. A membership allows the holder unlimited dining during any one-week period in the current year at the Adventurers' Club. HT purchased these memberships at a cost of $300 each, and while it has discretion over the selling price, it is currently offering them to its customers for $500. The primary targets of these memberships are corporations. A membership card good for one week during the customer's stay is issued upon receipt of the $500. Any memberships not sold during the current year will expire and have no future value. Requirements: Read ASC 606-10-55-36 through 40 in ASC 606, Revenue from Contracts with Customers, discussing implementation guidance for the principal versus agent determination. Review the examples in ASC 606-10-55-316 through 334F. Determine if HT is a principal or an agent for the gift certificates and the Adventurers' Club membership and, accordingly, how these revenues should be recorded. Provide a thorough explanation of your conclusions. Part IV: Background: The accountant then asked David to explain the merchandising program. David explained there are two primary merchandise programs. The first one has customized HT T-shirts that sell for $40 each. These typically would include a picture of the customer and the date and the specific adventure the customer participated in. The second program provides the sale of sweat shirts and hats from both Park Survival and Park Adrenaline. The agreements with the two parks are slightly different. Park Survival has a salesperson on- site at HT's location who manages the sales and inventory. The agreement with Park Survival requires its sweat shirts to be sold for $50 and its hats be sold for $20. When a sale of Park Survival's merchandise occurs, 60% of the sales price is remitted back to Park Survival. Park Survival has retained the ownership of its inventory and the risk for loss or stolen merchandise. Any flawed or damaged merchandise will be replaced by Park Survival. The agreement with Park Adrenaline states that HT can set the selling price, but the higher of $30 for sweat shirts and $10 for hats or 60% of the actual selling price must be remitted to Park Adrenaline. Additionally, HT has assumed the risk of any loss or stolen merchandise. HT is also responsible for returns if the customer does return the merchandise. Requirements: Read ASC 606-10-55-36 through 40 in ASC 606, Revenue from Contracts with Customers, discussing implementation guidance for the principal versus agent determination. Review the examples in ASC 606-10-55-316 through 334F. Determine if HT is acting as a principal or an agent for the sale of customized HT T-shirts, Park Survival sweat shirts and hats, and Park Adrenaline sweat shirts and hats and, accordingly, the amount of revenue that should be recorded. Provide a thorough explanation of your conclusions