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248 SECTION 1 The Role of Accounting as an Information System and then, at the end of each reporting period, make appropriate adjustments to sales returns and a refund liability to account for their estimate of remaining returns. We discuss these and other aspects of accounting for returns in more detail in Chapter 7. What if TrueTech had sold the Tri-Boxes on account rather than for cash? When TrueTech accounts for estimated returns, it wouldn’t make sense to record a refund liability to return cash it hadn’t yet received. So, instead of crediting a refund liability, TrueTech typically would credit a contra asset, allowance for sales returns, that reduces the book value, sometimes called the carrying value or carrying amount, of accounts receivable to $218,000 ($240,000  2  12,000). If the seller lacks sufficient information to be able to accurately estimate returns, the constraint on recognizing variable consideration we discussed earlier applies, and the seller should recognize revenue only to the extent it is probable that a significant revenue reversal will not occur later if the estimate of returns changes. In fact, the seller might postpone recognizing any revenue until the uncertainty about returns is resolved. Illustration 5–17 provides an example. Revenue Recognition Because of frequent sales price reductions and rapid technology obsolescence in the industry, we defer product revenue and related costs of sales from component sales made to distributors under agreements allowing price protection or right of return until the dis- Illustration 5–17 Disclosure of Revenue Recognition Policy—Intel Corporation. Real World Financials tributors sell the merchandise. IS THE SELLER A PRINCIPAL OR AGENT? Sometimes more than one company is involved in providing goods or services to a customer. In those situations, we need to determine whether a company is acting as a principal and providing the good or service to the customer, or an agent and only arranging for another company to provide the good or service. We view the seller as a principal if it obtains control of the goods or services before they are transferred to the customer. Control is evident if the principal has primary responsibility for delivering a product or service and is vulnerable to risks associated with holding inventory, delivering the product or service, and collecting payment from the customer. A principal’s performance obligation is to deliver goods and services. In contrast, an agent doesn’t primarily deliver goods or services, but acts as a facilitator that receives a commission for helping sellers provide goods and services to buyers. An agent’s performance obligation is to facilitate a transaction between a principal and a customer. Many examples of agents occur in business. One you’re familiar with is a real estate agent. Real estate agents don’t own the houses they sell, but rather charge a commission to help home owners transact with home buyers. Similarly, online auction houses like eBay, travel facilitators like Expedia, Inc. and priceline.com , and broad web-based retailers like Amazon.com act as agents for a variety of sellers. Complicating matters, these same companies also act as principals on some other arrangements, selling their own products and services directly to customers. For example, eBay acts as an agent by linking sellers with buyers, but acts as a principal when selling its PayPal transactionprocessing service. The distinction between a principal and an agent is important because it affects the amount of revenue that a company can record. If the company is a principal, it records revenue equal to the total sales price paid by customers as well as cost of goods sold equal to the cost of the item to the company. On the other hand, if the company is an agent, it records as revenue o nly the commission it receives on the transaction. In Illustration 5–18 we see the difference in accounting by principals and agents. We see from Illustration 5–18 that whether the seller is a principal or an agent can have a significant effect on its revenue. This is particularly important for start-ups or growthoriented companies that may be valued more for growth in revenue, than for growth in net income. A principal controls goods or services and is responsible for providing them to the customer. An agent doesn’t control goods or services, but rather facilitates transfers between sellers and customers. An agent only records its commission as revenue.


Spiceland_Inter_Accounting8e_Ch05
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