Revenue Recognition and US GAAP Harvard Case Solution & Analysis

Case Number 01

Q1: What are the accounting issue(s) and the relevant components of the authoritative literature?

The importance of timing regarding the revenue recognition can affect the financial performance of a company through effectively manipulating the accounting records relating to the timing of revenue recognition. For the treatment of revenue proceeds received in advance and in arrears is different from the actual inflow and outflow of economic resources, hence, the revenue should be recognized in accordance with the actual timing over which the outflow of economic resources and the performance of the service has been completed or partially completed by either party.Meanwhile, the revenue recognition raises the issues that can be faced while preparing the accounting information because several decisions are going to be made using that information. Hence, the inappropriaterecognition of revenues might lead to excess revenue in comparison to the correct picture of the same revenue. Furthermore, the treatment of unrealized revenues will need to be recorded and accounted for in the financial statements and realized revenues will be recorded separately from the unrealized revenues and charged to profit and loss account of certain period.

However, the general principle is that revenue should not be recognized in accounting records until it has been realized, meanwhile, the criteria that will decide about the revenue that whether it has been recognized or not has been set by the FASB and GAAP principles. Generally accepted accounting principles are developed that will help in the recognition of revenue as and when the economic outflow of resources is certain and the risk and rewards pertaining to a certain asset has been transferred to the buyer.

Q2: How does the fact that ChemInc has not shipped the MCA to Bond by the end of the year affect the recognition of revenue by ChemInc in 20X9? What other issues must be considered before deciding when ChemInc can recognize revenue? Explain your answer.

As a general rule of GAAP, we can say that if ChemInc has not shipped the MCA to Bond up till the end of financial year 20X9, then this will mean that since the under the usual term of a sale agreement the risk and rewards associated with an asset will only be transferred to the buyer when the actual physical assets are delivered to the site of the buyer and the risk and rewards of an asset will only be transferred when the physical custody of the goods is handed over to the buyer. Hence, as a rule of thumb the evaluation of the fact that the MCA has not been shipped to the Bond until the end of financial year 20X9, ChemInc should not record any of the revenue from this deal as realized revenue. (605-10-S99-1-SAB Topic 13.A.3)

In addition to this there are other factors that affect the revenue recognition such as the execution of a written agreement that would be signed by both the seller and buyer. Meanwhile, the terms of the agreement will make it clear that when the ownership of asset will take place, however, in the absence of any such terms the market norms would be considered as being the fairest terms for the transfer of ownership. Further, the GAAP rules governing the revenue recognition criteria states that the revenue would only recognize when the delivery of asset under consideration is made to the buyer and evaluation of the fact that ChemInc has not shipped the inventory on till the end of 20X9 would mean that the revenue should not recognized should not be recognized because the delivery has not taken place on till the end of 20X9. However, there are some other factors the needs to be considered, such as a buyer, not the seller had made had requested to use the Bill and hold basis for the execution of sale transaction. Additionally the date of delivery of goods must be predetermined and the delivery should show the reasonable grounds. In addition to this for the revenues to be recognized the sale agreement should not hold him responsible for taking care of the asset. Meanwhile, if the goods are sold on a bill and hold basis, thenthe sold goods that have been sold must be transferred to a separate locationand this separated goods should not be used to meet the revenues and finally the underlying goods must be ready for sale to take place.

Q3: What are the necessary journal entries for the quarters ending December 31, 20X9, and March 31, 20Y0?

The necessary journal entries would include the initial recognition of revenues and the resultant cost of goods sold on 20th December 2009, meanwhile, on 30th December 2009 when the cash payment is received it should be recorded on that date. Journal entries are prepared appendix...............

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