Question

Van Hatten Consolidated has three operating divisions: Oriole Publishing Division, Coronado Security Division, and Sheffield Advisory Division. Each division maintains its own accounting system but follows Oriole Publishing Division The Ori e Publishing Di son sells large volumes of novels to a few book distributors, which n turn sell to several national chains of bookstores. Ono e allows distributors to return up to 30% of sales, and the distributors give the same terms to bookstores, while returns from individual titles fluctuate greatly, the returns from distributors have averaged 20% n each of the past five years. A total of $7,420,000 of paperback novel sales were made to distributors during fiscal 2017. On November 30, 2017 (the end of the fiscal year), $1,590,000 of fiscal 2017 sales were still subject to return privileges over the next six months. The remaining $5,830,000 of fiscal 2017 sales had actual returns of 21% sales from fiscal 2016 totaling $2,120,000 were collected in fiscal 2017 less 18% returns. This division records revenue according to the revenue recognition method when the right of return exists. The Coronado Security Division works through manufacturers' agents in various cities. Orders for alarm systems and down payments are forwarded from agents, and the division ships the goods f.o.b. factory directly to the customers (usually police departments and security guard companies). Customers are billed directly for the balance due plus actual shipping costs. The company received orders for $6,360,000 of goods during the fiscal year ended November 30, 2017. Down payments of $636,000 were received, and $5,512,000 of goods were billed and shipped. Actual freight costs of $106,000 were also billed Commissions of 10% on product price are paid to manufacturing agents after goods are shipped to customers. Such goods are covered by the warranty for 90 days after shipment, and warranty returns have been about 1% of sales. Revenue is recognized at the point of sale by this division. The Sheffield Advisory Division provides asset management services. This division grew out of Van Hatten's own treasury and asset management operations, which several of its customers asked to have access to. On January 1, 2017, Sheffield entered into a contract with Scutaro Co. to perform asset management services for one year. Sheffield receives a quarterly management fee of 0.25% on Scutaro's assets under management at the end of each quarter. In addition, Sheffield receives a performance-based incentive fee of 20% of the fund's annual return in excess ofthe return on the S&P 500 index at the end of the year. At the end of the first quarter of 2017, Sheffield was managing $2,544,000 of Scutaro assets. The annualized return on the portfolio was 6.60% (the S&P 500 index had an annualized return of

Answer 1

Oriole Publishing Division-
A company recognizes revenue in the accounting period when a performance obligation is satisfied.
Oriole recognizes revenue when it delivers the books to its distributors. Hence Performance obligation in this case is delivery of books to distributors.
Revenue for Fiscal Year 2017
Sales for the Fiscal 2017	$7,420,000
Less: Return Liability (20 %)	$1,484,000
Revenue for the Year 2017	$5,936,000
Note-(‘1)The distributors can return up to 30 % of sales , but prior experience shows that 20 % of sales is expected average amount of returns.
(‘2) The collection figure of fiscal 2016 sales put no impact on revenue of 2017.
(‘3) The 21 % of return on initial sales of $5,830,000 shows that 20 % return estimates is reasonable.
Coronado Securities Division-
Coronado securities division recognizes the revenue when alarm systems are delivered to customers. Performance obligation in this case is delivery of alarm systems to customers.
Revenue for Fiscal 2017
Revenue= $ 5,512000
Notes-
(‘1) Orders for goods will not decide sales until goods are dispatched to customers.
(‘2) Similarly down payments received will not decide the sales.
(‘3) Revenue is the amount of goods actually billed and shipped to customers in case of FOB sales. Actual freight costs are expenses which will be reimbursed by customers.
(‘4) Similarly commissions and warranty returns are part of selling expenses.
Sheffield Advisory Division-
Sheffield will recognize the revenue over the period of time. Performance obligation in this case is provision of asset management services for a specified period of time. It means when each quarter ends, performance obligation is satisfied for each quarter and revenue will be recognized in each quarter.
Revenue
Revenue for first quarter of 2017 – ( $2544,000 x 0.25 %) = $6,360
Notes-
(‘1) Performance based incentive cannot be reasonably assured until the end of year. Hence performance incentive will be recognized at the end of year.