ISSUES IN ACCOUNTING EDUCATION American Accounting Association
Vol. 26, No. 3 DOI: XXXXXXXXXX/iace-50029
2011
pp. 609–618
A Series of Revenue Recognition Research
Cases Using the Codification
R. Mark Alford, Teresa M. DiMattia, Nancy T. Hill, and Kevin T. Stevens
ABSTRACT: This series of four short cases is designed to help students develop the
skills to research the Financial Accounting Standards Board’s (FASB) Accounting
Standards Codification and other authoritative literature. It also is designed to help
improve students’ ability to analyze and critique the complex issues that often su
ound
the accounting for revenue recognition. The case scenarios describe transactions in
which students must decide whether, when, and how much revenue to recognize. The
issues analyzed involve bill-and-hold, multiple-element a
angements, gross versus net
evenue reporting, and sales incentives. The cases are also designed to improve
teamwork and communication skills. The sequence of cases is intended for use in an
intermediate accounting class that covers revenue recognition, or in a capstone class
that emphasizes critical thinking and research skills.
Keywords: revenue; recognition; codification; research.
INTRODUCTION
R
evenue recognition is one of the top causes for financial statement restatements
(Whitehouse XXXXXXXXXXIn addition, revenue recognition is an area commonly questioned
y the Securities and Exchange Commission (SEC) staff in their review of public filings
and resultant comment letter process (Deloitte XXXXXXXXXXFurthermore, revenue recognition is often
prey to financial fraud (PricewaterhouseCoopers 2009).
Coverage of revenue recognition in intermediate accounting courses is typically limited to
learning and applying the criteria for revenue recognition outlined in the Financial Accounting
Standards Board’s (FASB) Statement of Financial Accounting Concepts No. 5, Recognition and
Measurement in Financial Statements of Business Enterprises, to routine transactions and topics,
such as long-term construction contracts and installment sales (FASB XXXXXXXXXXWhile these topics are
important, there are literally hundreds of revenue-generating transactions that are not covered in the
traditional financial accounting sequence.
The purpose of these cases is to enhance students’ research and critical thinking skills through
esolving ambiguous revenue recognition cases, using the FASB’s XXXXXXXXXXAccounting Standards
Codification (Codification or ASC) and other authoritative literature, including SEC Staff
R. Mark Alford is an Associate Professor, Teresa M. DiMattia is an Instructor, Nancy T. Hill is a Professor,
and Kevin T. Stevens is a Professor, all at DePaul University.
Published Online: August 2011
609
Accounting Bulletin, Topic 13: Revenue Recognition (SEC XXXXXXXXXXIn addition, the cases seek to
enhance students’ research, oral, and written skills.
CASE MATERIALS
Below are the case facts and case requirements for four revenue recognition cases.
Case One: Facts
Consumer Cleaning Products Corporation (CCPC) is a public company with a calendar year-
end. CCPC manufactures detergent that is ultimately purchased (and used) by consumers. The
supply chain consists of the following:
� CCPC sells its detergent to a wholesaler;
� The wholesaler sells the detergent to a retailer; and
� The retailer sells the detergent to a consumer.
CCPC launches a new detergent, Fresh & Bright, on September 1, 2009. In connection with
this launch, CCPC developed a comprehensive marketing campaign. Part of that campaign involves
eleasing (‘‘dropping’’) approximately 500,000 coupons in Sunday newspapers in locales in which
Fresh & Bright will be sold. When a consumer redeems the coupon upon purchasing a bottle of
Fresh & Bright from a retailer, the price charged to the consumer is reduced by $2. The retailer at
which the coupon is redeemed sends the coupon to a clearinghouse. CCPC reimburses the retaile
for the discount provided to the customer.
CCPC discontinues the coupons for its new detergent on October 1, 2009. The coupons expire
on October 1, 2010. CCPC has not offered coupons on detergent before, nor have they offered
coupons with a one-year expiration period. They have, however, offered coupons with a six-month
expiration date on other products. Those coupons had a 1.5 percent redemption rate. CCPC
estimates that approximately 2 percent of the detergent coupons will be redeemed by customers
prior to the expiration date. However, CCPC does not have any data on the redemption rate fo
coupons offered on detergent. CCPC has sold (and recognized revenue for) over $2,000,000 of
Fresh & Bright into the supply chain by September 30, 2009.
Case 1: Requirements
CCPC is considering how it should account for the Fresh & Bright coupon drop that took place
on October 1, 2009. In doing so, CCPC asks for your help. Prepare a memo addressing the
following questions. Base your analysis of the following questions on the relevant authoritative
literature and discuss the support in that literature for your conclusions. Be sure to cite the relevant
components of the Codification (available at: http:
asc.fasb.org) in your discussion. Citations are
not required for journal entries.
1. What are the accounting issue(s) and the relevant components of the authoritative
literature?
2. When should CCPC recognize the effects of the Fresh & Bright coupon drop in its
financial statements?
3. What is the dollar amount of the effect of the Fresh & Bright coupon drop on CCPC’s
financial statements?
4. What would constitute ‘‘sufficient evidence’’ to support CCPC’s expected redemption rate
of 2 percent?
5. What are the accounting implications if CCPC’s estimated redemption rate changes to 2.5
percent at a later point in time?
610 Alford, DiMattia, Hill, and Stevens
Issues in Accounting Education
Volume 26, No. 3, 2011
http:
asc.fasb.org
6. How should the effects of the Fresh & Bright coupon drop be reflected in the income
statement?
7. What are the necessary journal entries?
8. Prepare a PowerPoint presentation that covers the following points:
a. A summary of the case facts and an explanation of the accounting issue(s) that the
case raises.
. Identification and discussion of the relevant sections of the Codification that address
the facts in the case.
c. Conclusions reached in applying the authoritative literature to the case facts and the
questions above.
d. Any necessary journal entries.
Case Two: Facts
Landline Corporation is a public company with a calendar year-end. Landline provides a wide
variety of telecommunications services to a number of different customer groups, including routing
calls to one of several providers of psychic services with whom Landline has contracts. In Octobe
20X9, a new psychic service provider, Psychics ‘R’ Us (PRU), enters into an agreement with
Landline, and Landline adds PRU to its providers of psychic services.
When a customer calls a particular ‘‘1-900’’ number, (1) Landline is responsible for routing the
call to PRU’s offices or to those of another psychic service provider, depending on the availability
of psychics to take the call, and (2) if one of PRU’s psychics answers the call, he or she provides
psychic advice to the customer.
The a
angement between Landline and PRU calls for Landline to bill the customer $5 pe
minute spent using PRU’s ‘‘1-900’’ number. This per-minute charge is set by Landline and is
consistent with the amount charged per minute for advice from non-PRU psychics. The charge on
the customer’s bill notes the source of the billing as ‘‘Psychics ‘R’ Us.’’ Landline is responsible fo
emitting $4 per minute to PRU. If a customer does not pay the $5 per minute, Landline is still
esponsible for paying PRU the $4 net amount per minute for that customer’s usage of the ‘‘1-900’’
number.
All marketing for the psychic services is performed and paid for by PRU. Landline is not
mentioned in PRU’s marketing campaign. When the customer calls the ‘‘1-900’’ number and that
call is routed to PRU’s offices, the psychic that answers identifies himself or herself as ‘‘a psychic
with Psychics ‘R’ Us.’’
Case Two: Requirements
Landline is considering whether it should recognize revenue related to its a
angement with
PRU on a gross or net basis. In doing so, Landline asks for your help. Prepare a memo addressing
the following questions. Base your analysis of the following questions on the relevant authoritative
literature and discuss the support in that literature for your conclusions. Be sure to cite the relevant
components of the Codification (available at: http:
asc.fasb.org) in your discussion. Citations are
not required for journal entries.
1. What are the accounting issue(s) and the relevant components of the authoritative
literature? Assume, for purposes of interpreting the Codification, that Landline is the
‘‘entity.’’
2. Should Landline recognize revenue gross (i.e., as a principal) for the amount billed to the
customer for their time spent using the ‘‘1-900’’ number, or net (i.e., as an agent) for the
net amount retained by Landline?
A Series of Revenue Recognition Research Cases Using the Codification 611
Issues in Accounting Education
Volume 26, No. 3, 2011
http:
asc.fasb.org
3. What journal entries are necessary to appropriately account for each minute a custome
spends using PRU’s ‘‘1-900’’ number?
4. Prepare a PowerPoint presentation that covers the following points:
a. A summary of the case facts and an explanation of the accounting issue(s) that the
case raises.
. Identification and discussion of the relevant sections of the Codification that address
the facts in the case.
c. Conclusions reached in applying the authoritative literature to the case facts and the
questions above.
d. Any necessary journal entries.
Case Three: Facts
Assembly Lines Incorporated (ALI) is a public company with a calendar year-end. In its
cu
ent fiscal quarter, ending September 30, 20X9, it entered into a sales agreement with Candy
Maker International (CMI). Under the sales agreement, ALI is selling an assembly line system to
CMI that consists of the following three components:
� Mixer Segment
� Molding Segment
� Packaging Segment
ALI will install the assembly line system at CMI’s Chicago manufacturing facility, where it
will be used by CMI to manufacture candy bars. The sales agreement between ALI and CMI
provides for the following pricing:
Mixer Segment $40,000
Molding Segment 30,000
Packaging Segment 20,000
Installation 10,000
Total $100,000
The sales agreement is dated September 14, 20X9. ALI agrees to deliver the mixer segment
and molding segment to CMI by September 25, 20X9, as ALI has those two components of the
assembly line system on hand at the time the sales agreement is entered into. The sales agreement
does not provide CMI with a general right of return for any components of the assembly line. A
competitor offers a similar assembly line system.
ALI delivers the two components of the assembly line system on September 20, 20X9, and
agrees to deliver the packaging segment to CMI by December 20, 20X9. The delivery date for the
packaging segment is delayed because ALI does not have that component of the assembly line
system on hand at the time the sales agreement is entered into. As such, ALI has to manufacture that
component of the line. Because of the backlog of orders ALI has in its manufacturing department at
the time it enters into the sales agreement with CMI, it cannot commit to delivering the packaging