...Case Study: Velocity Cellular Case Study: Velocity Cellular Revenue Recognition in a Multiple-Element Arrangement Velocity Cellular Services is planning the rollout of a new prepaid phone service called Power Starterpack. Using the current, relevant accounting guidance, determine and support the appropriate method for recognizing revenue for this new product. Power Starterpack Details Velocity Cellular sells the Power Starterpack for $200. The Power Starterpack consists of two elements: a new activation card and a prepaid voucher for $50 worth of airtime. The new activation card allows the subscriber’s cellular phone to function and gives the subscriber additional features not available with the old activation card. Activation cards can be purchased separately from Velocity. Identical activation cards can be purchased from other vendors. The $50 prepaid airtime voucher must be used within 360 days or the remaining value is forfeited. If there is no activity for seven consecutive months, the subscriber’s account is closed and the phone number is deactivated. No refunds are given and the subscriber has no general rights of return for the Power Starterpack. Are the Deliverables Considered Separate Units of Accounting? Velocity Cellular adopted ASU 2009-13, “Revenue Arrangements with Multiple Deliverables” in the current fiscal year. The Update amends the criteria in Subtopic 605-25 for separating revenue in multiple-deliverable arrangements. The amendments...
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...The issue in Trueblood Case 09-2 is how to account for the funding that Pharmagen pharmaceutical company will receive from Company XYZ for research and development into a new drug, X. They also have to account for the royalty payments that Pharmagen will owe Company XYZ in the future. Pharmagen pharmaceutical company is working on developing a new drug, X. They have been self-funding the research and development costs. They entered into a Funding Agreement with Company XYZ, a private equity investor, who has agreed to provide Pharmagen with up to $500 million of the total cost needed to develop drug X over the estimated 3 year project time frame. Pharmagen is not obligated to successfully complete the drug and there are no performance obligations related to its development. The money received from XYZ is nonrefundable. However, the money provided by XYZ can only be used towards drug X. If Pharmagen successfully completed the drug and it is approved for public sale, XYZ will receive future royalty payments from both drug X and an existing drug that is already available for public sale. Pharmagen also retains the rights to drug X. Pharmagen should report their cash from XYZ Corporation as deferred income based on ASC 470-10-25-1 (Sales of Future Revenues). It states that when “an entity receives cash from an investor and agrees to pay the investor,” in this case a royalty of future sales, “it is assumed that immediate income recognition is not appropriate due to the facts and...
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...ACTG 493, Accounting Cases, Research and Analysis Group Case 1 Memorandum To: Professor Siyi Li From: Group 4 Date: July 5, 2016 Subject: eVade Pays Up (Deloitte Trueblood Case 14-07) I. Case Description and Key Facts eVade is an online retailer that fulfills its orders by shipping its products directly to customers across all 50 states in the U.S. eVade does not have a brick-and-mortar store presence in any state, but does operate distribution centers in various states, including State X. eVade does not collect or remit sales tax to State X. This practice is consistent with eVade’s practice in all 50 States. In recent court rulings, State X has taken the position that operating a distribution center within the state constitutes nexus and thus would subject any company operating a distribution center to collect and remit sales tax on all sales made within the state. As of December 31, 2011, eVade has operated a distribution center within State X for the past five years. Although the company considers the risk of detection to not be probable, eVade estimates total sales tax payable to State X to be $50 million. In addition, eVade estimates that $6 million in interest and $4 million in penalties are also payable to the state. On March 15, 2012, a tax amnesty program was established by the Governor of State X. The program provides that an unregistered taxpayer who voluntarily registers to collect sales tax prospectively will be forgiven...
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...TrueBlood Case 12-5 LabCo is a large construction contracting firm involved in the manufacturing of equipment that is used by other companies to manufacture parts and components for planes, jets and other machines and equipment of the air. Each machine produced by LabCo is tailored made to suit each of its many industry customers. As previously stated LabCo uses a variety of contracts primarily percentage-of-completion based, however, is that the correct approach to take? In addition the firm has recently entered into a fixed price contract with a high level of detail and heavily involved performance specification with Halibut, LabCo intends to use the percentage-of-completion method with this contract. When the contract was accepted and commencement began a great deal of difficulties arose that increased the expenses that LabCo had estimated and pushed back the completion date. With all of the difficulties that LabCo has faced the question should it use another method to account for the contract and if so what method should they use? The purpose of this report is to answer the two previously stated questions which are, under IFRS how should LabCo account for its construction contracts in general and what method should they use in regards to their newest contract with Halibut in the face of numerous complications. Normally special order equipment could include numerous costs that the firm would be unaware of until they arose. In regards to LabCo though, their primary...
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...Case 14-3 Coconut Telegraph Background on Coconut Telegraph Coconut Telegraph Corporation (Coconut) is a developer and provider of specialized customer billings and management software and systems. On February 1, 2012, Coconut had an arrangement with Buffet Worldwide Inc. (Buffet) to deliver the Volcano System and provide one year of post contract customer support (PCS). The PCS will start March 1, 2012. At the time of the arrangement, February 1, 2012, Buffet paid $12,000 for the Volcano System and the one year of PCS. On May 1, 2012 Coconut agreed to provide Buffet with training services on the customer management system and one additional year of PCS. This second arrangement was made under a separate contract and Buffet paid $4,500 for the additional services. 1.) Is Coconut’s February 1, 2012, arrangement with Buffett within the scope of ASC 985-605? The agreement with Buffett on February 1, 2012 is not within the scope of ASC 985. The agreement falls under the exception on ASC 985-605-15-4 paragraph e which states that the guidance on 15-3 does not apply to “software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.” Since the software of the Volcano System is sold with its hardware, which is a tangible product, and since the software components and non-software components...
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...Trueblood: US GAAP - Case 15-5 ASC470-60-20 states that a “a restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.” Although the “Restructuring” was done due to the debtor’s financial difficulty, there was no concession made by any of the creditors. The effective borrowing rate when considering all the terms of the “Modified Debt” is greater than the effective borrowing rate immediately prior to the “Restructuring”. All of the characteristics of the debtor’s situation should be considered when determining whether a modification constitutes troubled debt. The model and criteria discussed in ASC 470-60-55-4 through 55-14 should be followed. Since the circumstance do not warrant a “Troubled Debt” classification, the rules of 470-50 would be followed as either a Modification or Extinguishment. Resort Co. is extinguished from their liability, according to ASC 405, if either the debtor pays the creditor or the debtor is relieved of the obligation. If debt is extinguished before the scheduled and maturity date, a gain or loss may arise that amounts to the difference between the carrying value(including issuance costs) and the amount paid to settle the liability(including premium). The general rule for ASC 470-50-40-2 is a gain or loss must be recognized between the carrying value and fair value of...
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...Case 13-1: Refer-a-Friend Program Runway Discount is an online retailer that sells discounted high-end fashion. The company decided to create the Refer-a-Friend Program where a current customer can refer a friend to the website. Once the new customer purchases merchandise, the existing customer will receive a $25 credit towards their next purchase. The $25 credit represents the fair value of the cost Runway would pay to earn a new customer from an unrelated third party or marketing firm. Runway Discount should record the $25 Referral Credit as a marketing expense. According to 605-50-45-2 of the FASB Accounting Standards Codification, the referral credit should be considered as a cost incurred because it meets both of the following conditions: a. Runway Discount receives an identifiable benefit in exchange for the $25 credit. In addition, the $25 credit is separate from the recipient’s purchase of Runway Discount’s products in such a way that Runway Discount could have entered into an exchange transaction with a third party (marketing firm) that does not purchase its products and still receive the same benefit. b. Runway Discount can reasonably estimate the fair value of the benefit from a referred customer. Runway Discount should record the $25 referral credit when it recognizes the revenue created by the friend that was referred. Section 605-50-25-3 in the Codification states that in regards to sales incentives that will not result in a loss on the sale...
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...The Eye of the Potato Brief facts: Small Fries, Inc. has agreed with the Occupational Health and Safety Administration to undertake an “action plan” involving two of its plants, to bring them up to OSHA standards related to worker safety. The action plan includes an estimated $20 million of expenses, which we are told can be classified as repairs and maintenance. As the changes are to be completed within one year, the expenses have been budgeted into the 1997 operating budget. Small Fries intends to capitalize the repair costs, and has accrued none of them. Question 1: Should the costs associated with OSHA compliance be capitalized as an asset, or charged to expense? According to Keiso (Intermediate Accounting, 14th edition) accounting for improvements to assets is dependent on the type of improvements that are made, which is determined by asking whether the expenditure increases “future service potential”, or whether it simply maintains the existing level of service of the asset. Expenditures increasing future service potential should be capitalized, while maintenance should be expensed. Future service potential is unfortunately left undefined by Keiso, but several other writers have described it as related to production or output of the company’s product or service. Under this commonly understood definition, an improvement to an auto assembly line allowing production of ten cars in the time it previously took to build eight, would clearly enhance future service...
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...Trueblood Case 13-11: Income Taxes – LOL Case Facts: * Transaction Date: June 30, 2011 * Acquirer: LOL * Acquired: Sundance * LOL Tax Related Balances as of December 31, 2010 * $150mm Deferred Tax Asset * $105mm Valuation Allowance * Sundance Tax Related Balances as of Acquisition Date * $200mm Deferred Tax Asset * $200mm Valuation Allowance * Acquisition Date Decisions * Remove LOL Valuation Allowance of $105mm * Remove $150mm Valuation Allowance from Sundance books * Subsequent Information as of December 31, 2012 * Sundanced Valuation Allowance is unnecessary ($50mm) Guidance Summary: * Both IAS 12 and ASC 740 “require income taxes to be accounted for using an asset and liability approach that recognizes current tax effects and expected future tax consequences of events that have been recognized for financial or tax reporting (i.e., deferred taxes) each period.” * The overall approaches are similar, but there are several significant differences * in the treatment of uncertain tax positions, * deferred tax assets and the related valuation allowances, * offsetting and classification, * deferred tax effects on outside basis of investments, and * disclosures. | ASC740 | IAS12 | Recognition | More likely than not | Probable | Calculation | Enacted tax rates must be used | Enacted or ―substantively enacted‖ tax rates as of the balance sheet...
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...Case 13-1: Refer-a-Friend Program Runway Discount is an online retailer that sells discounted high-end fashion. The company decided to create the Refer-a-Friend Program where a current customer can refer a friend to the website. Once the new customer purchases merchandise, the existing customer will receive a $25 credit towards their next purchase. The $25 credit represents the fair value of the cost Runway would pay to earn a new customer from an unrelated third party or marketing firm. Runway Discount should record the $25 Referral Credit as a marketing expense. According to 605-50-45-2 of the FASB Accounting Standards Codification, the referral credit should be considered as a cost incurred because it meets both of the following conditions: a. Runway Discount receives an identifiable benefit in exchange for the $25 credit. In addition, the $25 credit is separate from the recipient’s purchase of Runway Discount’s products in such a way that Runway Discount could have entered into an exchange transaction with a third party (marketing firm) that does not purchase its products and still receive the same benefit. b. Runway Discount can reasonably estimate the fair value of the benefit from a referred customer. Runway Discount should record the $25 referral credit when it recognizes the revenue created by the friend that was referred. Section 605-50-25-3 in the Codification states that in regards to sales incentives that will not result in a loss on the sale of a...
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...Trueblood Case 14-3: Coconut Telegraph Brett O’Baker 9/14/15 Facts: * Coconut Telegraph Corporation (Coconut) is a developer and provider of specialized customer billings and management software and systems * On February 1, 2012, Coconut entered into an arrangement with Buffett Worldwide Inc. (Buffett) to deliver the Volcano System and provide one year of post-contract customer support (PCS) beginning March 1, 2012. * Buffett paid $12,000 on February 1, 2012, for the Volcano System and the related PCS. On May 1, 2012, and in a separate contract, Coconut agreed to provide Buffett with (1) training services on the customer management system and (2) an additional year of PCS. * Under the terms of this agreement, Buffett immediately paid consideration of $4,500 for the additional services. 1. Is Coconut’s February 1, 2012, arrangement with Buffett within the scope of ASC 985-605? Per ASC 985-605-15-3c, the software and software-related elements of arrangements that include software that is more-than-incidental to the products or services in the arrangement as a whole are within the scope. Indicators that software is more-than-incidental to the products or services in an arrangement as a whole include (but are not limited to): 1. The software is a significant focus of the marketing effort or is sold separately. 2. The vendor is providing post-contract customer support. 3. The vendor incurs significant costs that are within the scope of Subtopic 985-20...
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...Case 9-4 How should NeedsSpace account for the two obligations noted as provisions in the lease agreement? ● Provision 1: “Lessor may require the lessee to perform general repairs and maintenance on the leased premises.” By entering the lease agreement, NeedsSpace (the lessee) becomes legally and contractually responsible for performing general repair and maintenance on the leased premises. Assuming that the lessee is required to make deposits to financially protect the lessor concerning the maintenance obligation by setting up a reserve, the guidance in ASC 840-10-05-9A through 840-10-05-9C states that the maintenance reserve shall be recognized as a deposit asset and reimbursed later when the required repair and maintenance is completed by the lessee. However, the provision in the lease agreement does not call upon the lessee to make deposits but simply requires the lessee to perform repair and maintenance on the leased premises. Alternative 1: Accrual Method Since there is a contractual liability for the lessee to perform general repair and maintenance, the maintenance requirement provision may be assumed as a present economic obligation, not just a future commitment. If the fair value estimate of future maintenance expense can be measured with sufficient reliability, the provision may lead to recognition of an accrued liability for the repair and maintenance performance obligation at the inception of the lease. The accrued liability for the repair and maintenance...
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...Research File Memorandum Prepared by: Accounting Student Client: DrugKing. (The Company) Subject: Accounting for financial asset transfers with related call options and put options Background DrugKing transfers financial assets with related call options or put options to a substantive third party, InsureAll. There are three different security categories involved – preferred stock, debt security, and receivables. The DrugKing transfers its investments in the Series A and Series B preferred stock of Tip-Top to InsureAll. The Series A preferred stock is traded publicly (i.e. readily obtainable in the market place) and DrugKing holds a freestanding call option, written by InsureAll, which will allow it to repurchase the asset from InsureAll two years after the transfer date. The Series B preferred stock is not traded publicly (i.e. not readily obtainable in the market place) as the entire series was held by DrugKing prior to the transfer to InsureAll. The DrugKing attaches a call option directly to the Series B stock that will allow it to repurchase the asset from whoever owns it up to two years after the transfer date. Both options have a fixed exercise price. DrugKing also transfers its investment in a debt security to InsureAll. The asset is traded publicly (i.e. readily obtainable in the market place) and DrugKing holds a conditional call attached to the asset that will permit the DrugKing to repurchase the asset if LIBOR ever decreases below 4% (LIBOR was 6.5%...
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...With these developments, it is obvious that conflicts between parties of different nationalities occur and liability to tax on income of foreigners especially among those engaging in trading venture. Whilst the laws affecting domicile and residence may be sufficiently settled, it is paramount for courts to pursue a detailed analysis to ascertain specific preliminary issues so as to avoid controversial rulings. Courts often handle numerous financial cases that involve what can be best described as foreign or international elements. In such cases, court must decide whether it has the jurisdiction under the Family Law Act 1975 to make a decision on such cases. In the event that it is determined that the court is invested with the jurisdiction to determine the case, the court has to consider whether there is a system of law in foreign country that also has the jurisdiction to handle the case. As it was addressed in the case Attorney General of New Zealand v Ortiz [1984] AC 1, these benefits and costs to either party if the case resolution is made in foreign country as compared with the apparent country should also be a subject of concern. [1] Legal systems in most countries around the world adopt community property regime, which takes effect at the inception of marriage or at the time of divorce. For instance, California and Massachusetts in the United States have adopted community property regimes that support equal division of assets upon divorce. However, this provision...
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...Adapted from Bernhardt & Kinnear (1988). Cases in marketing management, pp. 6-16. Plano, TX: Business Publications, Inc. Pay careful attention to the following points. They are often used by instructors to evaluate either a written or oral analysis. 1. Be complete. Each area of the situation analysis must be discussed, problems and opportunities identified, alternative presented and evaluated using the situation analysis and relevant financial analysis, and a decision must be made. An analysis that omits part of the situation analysis or only recognizes one alternative is not a good analysis. Second, each area must be covered in-depth and within insight. 2. Avoid rehashing case facts. Every case has a lot of factual information. A good analysis uses facts that are relevant to the situation at hand to make summary points of analysis. A poor analysis just restates or rehashes theses facts without making relevant summary comments. 3. Make reasonable assumptions. Every case is incomplete in terms of some piece of information that you would like to have. A good case analysis must make realistic assumptions to fill in the gaps of information in the case. For example, the case may not describe the purchase decision process for the product of interest. A poor analysis would either omit mentioning this or just state that no information is available. A good analysis would attempt to present this purchase decision process by classifying the product and drawing upon real life...
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