320 SECTION 1 The Role of Accounting as an Information System 2. Assume that significant uncertainty exists as to the collection of the installment receivable and that Olive Branch elects to recognize initial franchise fee revenue using the installment sales method. Prepare the necessary journal entries for the dates listed in requirement 1 (ignore interest charges on the installment receivable and the costs of providing franchise services). 3. Examine your answer to requirement 1a of this problem (the January 30, 2016, journal entry under the installment sales method). What is the effect of that journal entry on Olive Branch’s balance sheet? (Ignore cash.) Briefly explain your answer. Broaden Your Perspective Apply your critical-thinking ability to the knowledge you’ve gained. These cases will provide you an opportunity to develop your research, analysis, judgment, and communication skills. You also will work with other students, integrate what you’ve learned, apply it in real-world situations, and consider its global and ethical ramifications. This practice will broaden your knowledge and further develop your decision-making abilities. On October 1, 2016, the Marshall Company sold a large piece of machinery to the Hammond Construction Company for $80,000. The cost of the machine was $40,000. Hammond made a down payment of $10,000 and agreed to pay the remaining balance in seven equal monthly installments of $10,000, plus interest at 12% on the unpaid balance, beginning November 1. Required: 1. Identify three alternative methods for recognizing revenue and costs for the situation described and compute the amount of gross profit that would be recognized in 2016 using each method. 2. Discuss the circumstances under which each of the three methods would be used. Vodafone Group, Plc, headquartered in the United Kingdom, is one of the world’s largest telecommunications companies. Excerpts from the revenue recognition disclosure included in its 2013 annual report are reproduced below. Judgment Case 5–17 Revenue recognition; installment sale IFRS Case 5–18 Comparison of revenue recognition in Sweden and the United States Note A1: Significant accounting policies Revenue Revenue is recognised to the extent the Group has delivered goods or rendered services under an agreement, the amount of revenue can be measured reliably and it is probable that the economic benefits associated with the transaction will flow to the Group. Revenue is measured at the fair value of the consideration received, exclusive of sales taxes and discounts. The Group principally obtains revenue from providing the following telecommunication services: access charges, airtime usage, messaging, interconnect fees, data services and information provision, connection fees and equipment sales. Products and services may be sold separately or in bundled packages. Revenue for access charges, airtime usage and messaging by contract customers is recognised as services are performed, with unbilled revenue resulting from services already provided accrued at the end of each period and deferred revenue from services to be provided in future periods deferred. Revenue from the sale of prepaid credit is deferred until such time as the customer uses the airtime, or the credit expires. Revenue from interconnect fees is recognised at the time the services are performed. Revenue from data services and information provision is recognised when the Group has performed the related service and, depending on the nature of the service, is recognised either at the gross amount billed to the customer or the amount receivable by the Group as commission for facilitating the service. Customer connection revenue is recognised together with the related equipment revenue to the extent that the aggregate equipment and connection revenue does not exceed the fair value of the equipment delivered to the customer. Any customer connection revenue not recognised together with related equipment revenue is deferred and recognised over the period in which services are expected to be provided to the customer. Revenue for device sales is recognised when the device is delivered to the end customer and the sale is considered complete. For device sales made to intermediaries, revenue is recognised if the significant risks associated with the device are transferred to the intermediary and the intermediary has no general right of return. If the significant risks are not transferred, revenue recognition is deferred until sale of the device to an end customer by the intermediary or the expiry of the right of return. In revenue arrangements including more than one deliverable, the arrangements are divided into separate units of accounting. Deliverables are considered separate units of accounting if the following two conditions are met: (1) the deliverable has value to the customer on a stand-alone basis and (2) there is evidence of the fair value of the item. The arrangement consideration is allocated to each separate unit of accounting based on its relative fair value.
Spiceland_Inter_Accounting8e_Ch05
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