Samsung is a marketing company that offers a variety of marketing offerings to its customers. Specifically:

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

If a customer purchases all these items together, the total amount owed to Samsung 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 the midpoint, 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 Samsung.

Appliance Inc. a customer, approaches Samsung with the hopes of reinventing its image to attract the younger population. Appliance Inc. has an oral agreement with Samsung that is based on Samsung's unsigned quote to Appliance Inc. on November 30, 2020, for one TV commercial, one app, and a Web page for total consideration of $1.5M and payment terms noted above. The agreement creates enforceable rights and obligations pursuant to Samsung's customary business practices. None of these items can be redirected by Samsung to another customer. Samsung performed a credit check on Appliance Inc. and has determined that Appliance Inc. has the intention and ability to pay Samsung for fulfilling its portion of the contract. Appliance Inc. is required to pay Samsung for performance completed to date if Appliance Inc. cancels the contract with Samsung for reasons other than Samsung's failure to perform under the contract as promised.

Appliance Inc. makes a payment on November 30, 2020, in the amount of $750K (50% of the total consideration of $1.5M) pursuant to the agreement. From the date of the quote, it takes Samsung six months to develop and produce the TV commercial, two weeks to complete the Web page, and three months to complete a fully functioning app. Samsung does not think that the app will be downloaded 500K times in the first month because Appliance Inc.'s customer base does not quickly accept newly developed technology. Based on its experience with similar technology, Samsung has determined that it takes over three months for Appliance Inc.'s users to begin to download its apps.

Instructions:

Access the Codification and specifically refer to ASC 606, Revenue from Contracts with Customers (ASC 606) and respond to the requirements below.

1. Samsung's CFO is trying to understand the new revenue recognition model and has asked you to explain how Samsung would account for the above scenario under the new standard.

2. How should Samsung account for the above offering with Appliance Inc? Specifically identify the specific pieces of the standard that Samsung meets. Do not just list the steps without connecting them to Samsung's specific situations. Show clearly labeled computations to support your discussion. Prepare journal entries where need if they will help in addition to your explanation.

3. How would your conclusions change if a variable consideration was present and included the following:

a. The app sold to Appliance Inc. Inc. is downloaded more than 500K times in the first month?

b. Samsung believed at the outset that there is about a 75 percent chance that the app will be downloaded more than 500K times and it is probable that there will not be a significant reversal of revenue.