298 SECTION 1 The Role of Accounting as an Information System for work completed during the month. Legal title to the gym passes to Star upon completion of the building process. If Star cancels the contract before the gym construction is completed, Regent removes all the installed equipment and Star must compensate Regent for any loss of profit on sale of the gym to another customer. Scenario 3: On January 1, the CostDriver Company, a consulting firm, entered into a three-month contract with Coco Seafood Restaurant to analyze its cost structure in order to find a way to reduce operating costs and increase profits. CostDriver promises to share findings with the restaurant every two weeks and to provide the restaurant with a final analytical report at the end of the contract. This service is customized to Coco, and CostDriver would need to start from scratch if it provided a similar service to another client. Coco promises to pay $5,000 per month. If Coco chooses to terminate the contract, it is entitled to receive a report detailing analyses to that stage. Scenario 4: Assume Trump International Tower (Phase II) is developing luxury residential real estate and begins to market individual apartments during their construction. The Tower entered into a contract with Edwards for the sale of a specific apartment. Edwards pays a deposit that is refundable only if the Tower fails to deliver the completed apartment in accordance with the contract. The remainder of the purchase price is paid on completion of the contract when Edwards obtains possession of the apartment. Required: For each of the scenarios, determine whether the seller should recognize revenue (a) over time or (b) when the product or service is completed. Explain your answer. Assume that Pfizer, a large research-based pharmaceutical company, enters into a contract with a start-up biotechnology company called HealthPro and promises to: 1. Grant HealthPro the exclusive rights to use Pfizer’s Technology A for the life of its patent. The license gives HealthPro the exclusive right to market, distribute, and manufacture Drug B as developed using Technology A. 2. Assign four full-time equivalent employees to perform research and development services for HealthPro in a specially designated Pfizer lab facility. The primary objective of these services is to receive regulatory approval to market and distribute Drug B using Technology A. HealthPro is required to use Pfizer’s lab to perform the research and development services necessary to develop Drug B using Technology A, because the expertise related to Technology A is proprietary to Pfizer and not available elsewhere. Required: What parts of this contract are separate performance obligations? Explain your reasoning for each obligation. Jerry’s Ice Cream Parlor is considering a marketing plan to increase sales of ice cream cones. The plan will give customers a free ice cream cone if they buy 10 ice cream cones at regular prices. Customers will be issued a card that will be punched each time an ice cream cone is purchased. After 10 punches, the card can be turned in for a free cone. Jerry Donovan, the company’s owner, is not sure how the new plan will affect accounting procedures. He realizes that the company will be incurring costs each time a free ice cream cone is awarded, but there will be no corresponding revenue or cash inflow. The focus of this case is on how to account for revenue if the new plan is adopted. Your instructor will divide the class into two to six groups depending on the size of the class. The mission of your group is to reach consensus on the appropriate accounting treatment for the new plan. That treatment should describe when revenue is recognized and how it will be calculated. Required: 1. Each group member should deliberate the situation independently and draft a tentative argument prior to the class session for which the case is assigned. 2. In class, each group will meet for 10–15 minutes in different areas of the classroom. During that meeting, group members will take turns sharing their suggestions for the purpose of arriving at a single group treatment. 3. After the allotted time, a spokesperson for each group (selected during the group meetings) will share the group’s solution with the class. The goal of the class is to incorporate the views of each group into a consensus approach to the situation. AuctionCo.com sells used products collected from different suppliers. Assume a customer purchases a used bicycle through AuctionCo.com for $300. AuctionCo.com agrees to pay the supplier $200 for the bicycle. The bicycle will be shipped to the customer by the original bicycle owner. Required: 1. Assume AuctionCo.com takes control of this used bicycle before the sale and pays $200 to the supplier. Under this assumption, how much revenue would AuctionCo.com recognize at the time of the sale to the customer? Judgment Case 5–6 Performance obligation; licensing ● LO5–5, LO5–7 Communication Case 5–7 Performance obligations; loyalty program ● LO5–5 Judgment Case 5–8 Principal or agent ● LO5–6
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