Revenue Recognization

To introduce Accounting 381 students to the responsibility and obligation of CPAs to perform research in the Codification, you will be required to analyze the case below:

You are newly certified public accountants recently hired by Williams Certified Public Accountants, LLP. Your client, Magnificent Marketers (MM) needs guidance on the application of the correct FASB pronouncement related to their situation. Your direct supervisor wants you to research the authoritative guidance related to this situation and determine the proper course of action before meeting with your client.

Magnificent Marketers (MM) is a marketing company that offers a variety of marketing offerings to its customers. Specifically:

MM will create a TV commercial for $1M, build an app for $500K, and build a Facebook page for $250K. These amounts represent MMs charges for these items when MM sells them separately to customers. The TV commercial, the app, and the Facebook page are not interrelated; that is, each functions independently of the other offerings.

If a customer purchases all aforementioned items together, the total cost is $1.5M. Payment terms are 50 percent consideration due at contract signing, with the remaining 50 percent due over the rest of the development period (25 percent at mid-point, 25 percent at completion).

If the app is downloaded 500K times or more in the first month, there is a one-time bonus of $250K payable to MM.

Stone, a customer, approaches MM with the hopes of reinventing its image to a younger customer base. Stone has a verbal agreement with MM that is based on MMs unsigned quote to Stone on November 30, 20X8, for one TV commercial, one app, and a Facebook page. The agreement creates enforceable rights and obligations pursuant to MMs customary business practices. None of these items can be redirected by MM to another customer. MM performed a credit check on Stone and has determined that Stone has the intention and ability to pay MM for fulfilling its portion of the contract. Stone is required to pay MM for performance completed to date if Stone cancels the contract with MM for reasons other than MMs failure to perform under the contract as promised. MM does not think that the app will be downloaded 500K times in the first month because Stones customer base does not quickly accept newly developed technology. On the basis of its experience with similar technology, MM has determined that it takes over three months for Stones users to begin to download its apps.

MMs CFO is trying to understand the new revenue recognition model and has turned to your firm to explain how MM would account for the above scenario under the new standard.

Required for Part 2:

Each student must turn in their own solutions to this case, which needs to be written in your own words.However, since this is an out of class assignment, you may consult with other students if you need direction. To assure fairness to all students, instructor assistance on this case will not be available. The analysis required below should be NO longer than three pages.

Please do the following question:

1. List the Area and Topic number from the Codification that you will be researching to resolve your clients question.

2. Cite the proper ASC (XXX)-(YY)-(ZZ)-(PP) that lists the five-step revenue recognition process as set forth in the Codification.

3. For each of the five steps in the process, analyze in detail and support your conclusion for your clients situation by citing the proper Codification reference as follows ASC (XXX)-(YY)-(ZZ)-(PP). Specifically, include:

Step One Is there a contract?

Step Two- Identify the performance obligations.

Step Three-Determine the transaction price.

Step Four-Allocate the transaction price to the performance obligations.

Step Five-Recognize revenue when (or as) the entity satisfies a performance obligation. Please just define the decision making process used to determine if revenue should be recognized over time or at a point in time and cite the proper Codification reference. The case above does not give you enough specifics to determine a specific course of action. However, it is your responsibility to give your client all the detail to draw their own conclusion.