The following situations are independent.
1. Carlson Company is an international consulting firm that has received a two-year engagement from a client for a fee of $2 million. The company will assign differing numbers of personnel to the project depending on the needs of the project and the availability of personnel.
The company requires a down payment of 10% and makes periodic billings based on the hours worked by the personnel, plus 20% profit. At the end of the engagement, the company and the client will negotiate whether an adjustment to the fee is appropriate.
2. The Fast Loss Health Club has three types of memberships: 1-year, 3-year, and 10-year. Each type of membership requires an initial fee as well as monthly fees. To encourage memberships, the company offers numerous incentives, such as free dues for the first two months and drawings for free vacation trips. In addition, the company advertises heavily at certain times of the year, such as during the Christmas period. The company also offers special programs to its members for a fee and allows nonmembers to participate for a higher fee.
3. The New Encyclopedia Company ships five complete sets of its 12-volume encyclopedia to each of its new distributors. Each distributor has six months to sell all the encyclopedias and pay the company the selling price, less a 40% commission, within five days of each sale. During this period, the distributor may return the encyclopedias without obligation and at the company’s expense. At the end of six months, the distributor must pay the selling price of the unsold encyclopedias, less a 60% commission.
Required
Discuss the revenue recognition issues that exist in each independent situation. Discuss any issues that exist in matching the expenses against the revenues.