Revenue Recognition Case Study: 1

Entity A has an existing manufacturing customer, entity B, who has recently announced that it expects to have to restructure its debt with current creditors, including entity A, in order to ensure sufficient operating liquidity to avoid bankruptcy. Subsequent to the announcement, Entity A ships an order of replacement parts to entity B based on a purchase order received from entity B prior to announcement. You are required to: 1. Answer when A should recognize revenue? 2. Treatment of Dr. Balance in B Account

Ans: Entity A should not recognize revenue for the latest shipment to entity B as its not probable that the economic benefit related to the products shipped will flow the entity.
Entity A may record revenue when entity B pays for the shipment of replacement parts, which is when it becomes probable that the economic benefit will flow to entity A and when the amount of revenue can be measured reliably. In contract, any allowance recorded against any existing receivable balance as a result of entitys B announcement of its need to restructure debts should be recorded as expenses not as a reversal of revenue.

Revenue Recognition Case Study: 2

Entity A is a retailer and offers interest-free credit to a customer as part of its marketing strategy. The interestfree credit is provided by a finance company. The legal form of the transaction is that entity A sells the goods to the customer at $100 and simultaneously the customer enters into a finance arrangement with the finance company. This arrangement results in the finance company settling the customers account with the retailer and receiving $100 from the customer over two Years. Current Interest rate is 10%. The finance company does not have any recourse to entity A for bad or slow payment by the customer. How much revenue should entity A recognize and when? Ans: Entity A will receive $81 from the finance company in respect of the sale at, or close to the time of the sale, Entity A should therefore recognize revenue of $81 immediately. A should derecognize the receivable of $81 on receipt of the consideration from finance company. The finance company does not have recourse to entity A in respect of slow payment or non-payment by the customer. Assuming all the arrangements other term support the conclusion that entity A has transferred substantially all the risk and rewards of ownership of the receivable to the finance company.

Revenue Recognition Case Study: 3

Entity A sells materials for making door profiles to a manufacturer who assembles the frames and puts glass in the door. Entity A then repurchases the doors and sells them to a house builder for installation in homes. Should the sale of the materials for the door profiles to the manufacturer be accounted for separately from the purchase of doors from the same manufacturer or should the transactions be regarded as linked and conditional on each other for accounting purpose? Ans: The manufacturer buys