Question

Case 2

PeeDee Marketers (PM) is a marketing company that offers a variety of offerings to its customers. Specifically:

• PM will create a TV commercial for $2M, build an app for $1M, and build a Facebook page for $500K. These amounts represent PM’s charges for these items when PM sells them separately to customers. The TV commercial, the app, and the Facebook page are not interrelated; that is, each functions independently of the other offerings.
• If a customer purchases all aforementioned items together, the total amount owed to PM is $3M. Payment terms are 50 percent consideration due at contract signing, with the remaining 50 percent due over the rest of the development period (25 percent at midpoint, 25 percent at completion).
• If the app is downloaded 500K times or more in the first month, there is a one-time bonus of $300K payable to PM.

Stone, a customer, approaches PM with the hopes of reinventing its image to a younger customer base. Stone has a verbal agreement with PM that is based on PM’s unsigned quote to Stone on November 30, 2019, for one TV commercial, one app, and a Facebook page for total consideration of $3M and payment terms noted above. The agreement creates enforceable rights and obligations pursuant to PM’s customary business practices. None of these items can be redirected by PM to another customer. PM performed a credit check on Stone and has determined that Stone has the intention and ability to pay PM for fulfilling its portion of the contract. Stone is required to pay PM for performance completed to date if Stone cancels the contract with PM for reasons other than PM’s failure to perform under the contract as promised. Stone makes a payment on November 30, 2019, in the amount of $1.5M (50% of total consideration of $3M) pursuant to the agreement. From the date of the quote, it takes PM six months to develop and produce the TV commercial, two weeks to complete the Facebook page, and three months to complete a fully functioning app. PM does not think that the app will be downloaded 500K times in the first month because Stone’s customer base does not quickly accept newly developed technology. On the basis of its experience with similar technology, PM has determined that it takes over three months for Stone’s users to begin to download its apps. Required PM’s CFO is trying to understand the new revenue recognition model and has asked you to explain how PM would account for the above scenario under the new standard.

Your case should include a write-up (a minimum of several paragraphs, with complete sentences) answering the questions below and citing support from the FASB codification.

1. How should PM account for the above offering with Stone under the new revenue recognition model?

2. How would your conclusions change if:

a. The app sold to Stone is actually downloaded more than 500K times in the first month?

b. PM believed at the outset that there is about a 75 percent chance that the app will be downloaded more than 500K times and it is probable that there will not be a significant reversal of revenue?

Answer 1

SOLUTION

(A) In the case above it is mention that the peedee company is coming under the contract with the client stone.In which PM marketing company build an app for $1 million build a tv commercial for $2 million and facebook page for $500k.Cost of all them are $2 million + $1 million +$500k = $3.5 million and company also states that if a clients want to buy all of them together it would cost them $3 million.So company is giving $500k discount to the customer.Stone wants to buy them alltogether and as per company policy he have to give company half amount of transaction first.Stone makes a payment on november 30,2019,in the amount of $1.5 million(50% of total consideration of $3 million) pursuant to the agreement.

Journal entries for recording the money received from stone.

1. Cash DR $1.5M

To account receivable $1.5M

(Being the half of the amount of the transaction received from stone)

PM takes 9 months to week for compliting the project an as per the company norm stone has to give 25% of the amount in the mid time of compliting the project.

Journal for the same

Cash DR $750K

To account receivable $750K

(Being 50% of the remaining amount is received)

Now as the company beleives that there would not be app download 500k times or above so there would not be any revenue recognised.

2. (A) As per the question if app is downloaded more than 500k times than the company PM will received a bonus of $300k.The company will earn revenue of $300k as a one time bonus.

Journal entries for the same

Cash DR $300k

To bonus receivable $300k

(Being the one time bonus received)

(B) In the question PM company beleived that there is about 75% chance that an app would be downloaded equals to 500k times or more and the company can earn revenue but as per the GAAP revenue can only be determined when a company 100% sure about it according to conservatism principle all the loses are gains only be anticipated and relized when the company is certain about it so there is no Journal entries required.