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Lookhere.com and StopIn.com enter into a reciprocal agreement whereby (1)Stopin.com is given valuable advertising space on...

Lookhere.com and StopIn.com enter into a reciprocal agreement whereby (1)Stopin.com is given valuable advertising space on the home page of Lookhere.com and (2) Lookhere.com is given valuable advertising space on the home page of Stopin.com. the main source of revenue for both Stopin.com and Lookhere.com is sales of advertising on their respective websites. Both companies recognize advertising revenue received from the other company and recognize advertising expense paid to the other company. Accounting regulators express support for the accounting treatment applied by these companies.

Do you believe these companies should be allowed to recognize revenue in conjunction with the advertising agreements described above?

Why do you believe these companies want to record revenue along with its offsetting expense for these transactions?

How would you assess such transactions in an analysis of these companies?

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ANSWER a) The revenue recognition stirs argument. As the transaction meets the revenue recognition criteria, many consider it is reasonable and justified for both companies to record offsetting of revenues and fixed cost from the contract. On the other hand, opponents of this treatment question about the reservations and completeness of the earming process b) revenue and revenue growth are measured the primary indicators of future prospects for this dot.com (intemet companies). In a bid to maximize the reported revenues, these dot com companies enter into such dealings in which the growth in revenues are entirely offset by the growth expenses. In the process, the revenue and revenue growth is achieved. Moreover, these transactions affect the bottomline in a negative way and since the bottomline is not a primary indicator for dot com companies, they are willing to pamper in such practices c) As an analyst, these transactions should not be considered while estimating the top line growth of the company as it would be ambiguous as no real value has been added to the company. While estimating the top line growth, only the real revenues generated from the core customers need to be measured.

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