Question

You work for King’s Gate, a publicly traded movie production company. King’s Gate plans to release “Beautiful World”, a children’s action movie, toward the beginning of the next period. To promote the film, King’s Gate has arranged to include promotional toys in children’s meals sold by Cluckin’ Hen, a national fast food chain. The CEO wants to recognize licensing fee revenue from the fast food arrangement as it is realized, explaining that he sees no reason to delay such recognition. The CFO want to delay recognition until the release of the film, reasoning that toy revenue is a “byproduct” of the related film, and recognition of that revenue should wait until release of the film. Research the appropriate codification and locate the correct guidance in addressing the issue.

Answer 1

Revenue recognition is an accounting pricipal that identify the condition in which revenue is recognized. Revenue should recognized when a critical event has occurred and the amount is measurable to the company.

Accrual accounting should follow in recognition of  revenue which requires that revenues are recognized when it is realized and earned not when cash is received.

as per generally accepted accounting principle the feature of accual accounting requires that revenue should recognised in the financial statement only when all the following condition are fulfill

1. When transfreres the little of the goods and in case of service than it should be rendered.

2. When the delivery of the goods has been done.

3. There is no uncertainity to recover the amount of goods or services.

Step:2 Given Case

In the given case the CEO of the king gate wants to recognised the revenue of licence fee as it is realised but the service is not rendered. on the other way CFO wants to delay in recognistion until the release of the film reasoning that toy revenue is a by product of the related film and the recognistion of revenue should wait until release of the film.

Step: 3 Conclusion

As per the above discussion CEO decision is not justify to the company since service is not yet rendered realization of the license fee is just like a liability to the company and should not be recognised as revenue because all the requirment of revenue recognition criteria (mentioned above) is not fulfill by the company hence it is loud and cleare that licence fee should not entitled to recognize as revenue until movie is released.