You are an audit senior on the Rainier Inc. (Rainier or the "Company") audit team. This is the first year your firm has audited Rainier. Revenue recognition is a presumed significant risk on every audit and is a critical accounting policy for Rainier. There are multiple considerations for revenue recognition that must evaluated. Your audit partner has asked you to develop a memo documenting your preliminary assessment of whether Rainier is a principal or an agent in their core business transactions. This memo will be combined with the revenue recognition memos of other team members to full document your firm's considerations of revenue recognition at Rainier. Your partner would also like you to prepare a 6-8 minute presentation to provide to the client to highlight your audit team's considerations and ultimate conclusion.

Background:

Rainier Inc., an SEC registrant, is a wholesale grocery distributor and retailer in the United States. One of the Company's core businesses is distributing grocery products to restaurants. Maroon Bells Inc. (MBI) operates a chain of restaurants throughout the world and contracts with manufacturers to obtain grocery and related products for the chain. Manufacturers either deliver the products to MBI's restaurants directly or, more commonly, contract with distributors such as Rainier to deliver the products.

The following steps summarize the flow of transactions when a manufacturer contracts with distributors (e.g., Rainier) to deliver products to restaurants designated by MBI:

1. The manufacturer provides MBI with the details of each product to be sold to the restaurants, and MBI approves the products on the basis of the specifications outlined by the manufacturer. Once the products are approved, MBI enters into a master contract with the manufacturer to supply the products (the "Master Contract").
2. The manufacturer selects a distributor (e.g., Rainier) to be named as the official representative to MBI. The manufacturer and Rainier enter into a distribution contract (the "Distribution Contract*), which typically specifies (a) the restaurants that the Company may supply to on behalf of the manufacturer, (b) the manufacturer's products that have been approved by MBI to be supplied, (c) service and delivery requirements, and (d) payment terms.
3. Rainier issues a purchase order to the manufacturer for products. The products are then delivered to the Company and held in the Company's distribution warehouses. Title of the products transfers from the manufacturer to the Company in accordance with the shipping terms specified in the Distribution Contract. The Company is required to keep inventory on hand, regardless of whether MBI has placed an order for the products.
4. The Company pays the manufacturer for the inventory on the basis of the published distributor list price at the time of purchase ("Distributor Product Cost").
5. As restaurants need to be restocked, MBI identifies the manufacturer that sells the necessary products, determines which distributor is the manufacturer's official representative for a particular restaurant, and then issues a purchase order with that distributor (e.g., Rainier) under the terms of MBI's Master Contract with the manufacturer.
6. The Company, acting as the distributor, locates the products ordered by MBI in its existing inventory and ships the products to the restaurants designated by MBI. Generally, title of the products transfers directly from the Company to MBI (i.e., title of the products does not revert back to the manufacturer).
7. The Company invoices MBI on the basis of the price agreed to and included in the Master Contract between the manufacturer and MBI ("MBI Product Cost")

Additional information related to Rainier's operations:

The Distribution Contract explicitly states that Rainier may not sell the products it purchases under such contract to customers other than MBI without obtaining permission from the manufacturer. The Company has a past business practice to request such permission before selling products to others. However, if a perishable product is nearing its expiration date, the Company's customary business practice is to sell the product to another customer without obtaining the manufacturer's permission, even if the contract requires such permission.

Typically, the Company may only return products to the manufacturer for quality related issues. In most cases, the Company is liable for any obsolete products and may not return such products to the manufacturer.

The manufacturer is responsible for the acceptability of products from a customer specification perspective (i.e., the manufacturer must meet the product specifications approved by MBI).

Rainier is responsible for the acceptability of products from a quality perspective, and therefore is responsible for any damaged or obsolete products delivered to the restaurants.

Rainier has title to the inventory that it purchases from the manufacturer and currently pledges such inventory as collateral for borrowings under the Company's credit agreement.

On average, approximately 15 percent to 20 percent of the Company's borrowings under its current credit agreement are secured by pledging inventory that will be sold to MBI.

The Company does not have discretion in establishing the price paid by MBI under the Master Contract (i.e., the MBI Product Cost). The MBI Product Cost is established through negotiations between MBI and the manufacturers.

Rainier negotiates with the manufacturers for purposes of establishing the Distributor Product Cost, which is established in the Distribution Contracts with manufacturers.

Therefore, the Company bears the risks and rewards of changes in the Distributor Product Cost between when it purchases the products from the manufacturer and when the products are sold to MBI.

Required:

Pursuant to ASC 606, Revenue From Contracts With Customers, determine whether Rainier is a principal or an agent in the arrangement to supply products to the restaurants designated by MBI, and therefore whether the Company should recognize revenue on a gross or net basis.