Question
X, a public company, is an electronic goods retailer. Xs management team is very innovative and markets its products to cater to consumer trends and
X, a public company, is an electronic goods retailer. Xs management team is very innovative and markets its products to cater to consumer trends and preferences. As such, managements bonus is given a bonus equal to 10% on new revenues generated each year. Xs covenant with the local bank is based on its current ratio. At the start of the current fiscal year. X changed form selling all of its products with a n optional 3rd party extended service warranty to selling an in-house service warranty as part of the normal retail selling price of the product. Therefore, the revenue stream form the service plan changed from being a commission from the 3rd party vendor, who took full responsibility for doing the actual repairs, to revenue being recorded as part of Xs selling price; X is now fully responsible for the actual repairs. The new program was a tremendous success and accounts for a 5% increase in Xs annual revenues with a corresponding 5% increase in its accounts receivable. Xs management team wanted to continue recognizing the service revenue at the time the product is sold. Xs auditor objected to this accounting policy choice.
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Who are two users of Xs financial statements and what are their decision-making needs?
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What is the impact to Xs assets, liabilities, revenues and/or expenses from the proposed accounting change?
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What are TWO relevant GAAP/ financial statement concepts applicable to this situation?
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Give 1 case fact to support the items mentioned in 2 above?
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Give 1 case fact to dispute the items mentioned in 2 above?
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What is your recommendation?
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What is the impact of your recommendation to the users mentioned in 1 above?
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