We have a new client, a start-up called Spark Software. This is their first year with us, and we must make sure they recognize their revenue properly. Spark Software offers customers an inventory management app.

They charge customers up front for a one-year subscription, and customers can cancel their subscription anytime within the first 60 days to receive a full refund. Customers can renew their subscriptions each year, 2 months before the subscription expires.

Spark Software so far has 3 clients. Below are the dates on which each client signed up and paid for the app, and the amount each paid (different customers get different pricing based on negotiations with the sales team):

Customer A
Joined: January 1, 2020
Paid: $10,000
Renewed: May 31, 2021
Paid: $10,000

Customer B
Joined: March 15, 2020
Paid: $15,000
Cancelled: April 15, 2020

Customer C
Joined: June 30, 2020
Paid: $10,000
Renewed: May 31, 2021
Paid: $10,000

How and when should Spark Software recognize revenue for each of these customers’ purchases? Which income statement and balance sheet accounts will be affected?

Take a look at how the new revenue pronouncement, ASC 606, applies to software companies. Also take a look at ASC 606 itself.
Summarize the 5 steps to recognize revenue per ASC 606, then write a paragraph explaining the methodology Spark Software should use to recognize revenue. How much revenue will Spark Software have recognized by their fiscal year-end on December 31, 2020?

-Write a revenue recognition memo to the file that describes how the new revenue pronouncement applies to software companies.

-Use the research tools at your disposal within your organization to search for guidance and specifically address the following:
Summarize the 5 steps to recognize revenue per ASC 606.

-Write a paragraph explaining the methodology the company should use to recognize revenue.

-Use the guidance in ASC 606 to justify your methodology.

-Calculate how much revenue the company should recognize by their fiscal year-end, which is the end of the calendar year.