exercises

Intermediate Accounting 2
Outback Industries manufactures emergency power equipment. Its most popular
generator is a model called the E-Booster, which has a retail price of $1,500 and costs
Outback $740 to manufacture. It sells the E-Booster on a standalone basis directly to
businesses, as well as provides installation services. Outback also distributes the E-
Booster through a consignment agreement with Lenz Home Store. Income data for
Outback's first quarter of 2019 from operations other than the E-Booster generator are
as follows.
Revenues $6,500,000
Expenses 4,350,000
Outback has the following information related to four E-Booster revenue
arrangements during the first quarter of 2019.

Outback entered into an arrangement with the Grocers Co-op to deliver E-Boosters for
the meat lockers in the grocers' stores. Outback provides a 5% volume discount for E-
Boosters purchased by Grocers Co-op if at least $450,000 of E-Boosters are purchased
during 2019. By March 31, 2019, Outback has made sales of $360,000 ($1,500 × 240
generators) to Grocers Co-op. Based on prior experience with this promotion in two
neighboring states, the discount threshold is met for the year if more than one-half of
the target had been met by mid-year.
On January 1, 2019, Outback sells 20 E-Boosters to Nick's Liquors. Nick's signs a 6-
month note due in 6 months at an annual interest rate of 12%. Outback allows Nick's to
return any E-Boosters that it cannot use within 120 days and receive a full refund.
Based on prior experience, Outback estimates that three units will be returned (using
the most likely outcome approach). Outback's costs to recover the products will be
immaterial, and the returned generators are expected to be resold at a profit. No E-
Boosters have been returned as of March 31, 2019, and Outback still estimates that
three units will be returned in the future.
Outback sells 30 E-Boosters to First Bank, to provide uninterrupted power for bank
branches with ATMs, for a total contract price of $50,000. In addition to the E-
Boosters, Outback also provides installation at a standalone selling price of $200 per
E-Booster; the cost to Outback to install is $150 per E-Booster. The E-Boosters are
delivered and installed on March 1, 2019, and full payment is made to Outback.

Outback ships 300 E-Boosters to Lenz Home Store on consignment. By March 31,
2019, Lenz Home Store has sold three-fourths of the consigned merchandise at the
listed price of $1,500 per unit. Lenz Home Store notifies Outback of the sales,
retains an 8% commission, and remits the cash due to Outback.

Instructions
a. Determine net income for Outback Industries for the first quarter of 2019. (Ignore
taxes.)
b. In reviewing the credit history of Nick's Liquors, Outback has some concerns
about the collectibility of the full amount due on the note. Briefly discuss how
collectibility of the note affects revenue recognition and income measurement for
Outback.
 Questions
1. When is revenue recognized in the following situations? (a) Revenue from selling
products, (b) revenue from services performed, (c) revenue from permitting others to
use company assets, and (d) revenue from disposing of assets other than products.

2. Allee Corp. is evaluating a revenue arrangement to determine proper revenue

recognition. The contract is for construction of 10 speedboats for a contract price of
$400,000. The customer needs the boats in its showrooms by February 1, 2020, for the
boat purchase season; the customer provides a bonus payment of $21,000 if all boats
are delivered by the February 1 deadline. The bonus is reduced by $7,000 each week
that the boats are delivered after the deadline until no bonus is paid if the boats are
delivered after February 15, 2020. Allee frequently includes such bonus terms in it
contracts and thus has good historical data for estimating the probabilities of
completion at different dates. It estimates an equal probability (25%) for each full
delivery outcome. What approach should Allee use to determine the transaction price
for this contract? Explain.
3. Fuhremann Co. is a full-service manufacturer of surveillance equipment. Customers
can purchase any combination of equipment, installation services, and training as part
of Fuhremann's security services. Thus, each of these performance obligations are
separate with individual standalone selling prices. Laplante Ltd. purchased cameras,
installation, and training at a total price of $80,000. Estimated standalone selling
prices of the equipment, installation, and training are $90,000, $7,000, and $3,000,
respectively. How should the transaction price be allocated to the equipment,
installation, and training?
4. Under what conditions does a company recognize revenue over a period of time?

5. Explain the accounting for sales with right of return.

6. What are the reporting issues in a sale with a repurchase agreement?

7. What qualitative and quantitative disclosures are required related to revenue

recognition?
8. Leno Computers manufactures tablet computers for sale to retailers such as Fallon
Electronics. Recently, Leno sold and delivered 200 tablet computers to Fallon for
$20,000 on January 5, 2019. Fallon has agreed to pay for the 200 tablet computers
within 30 days. Fallon has a good credit rating and should have no difficulty in making
payment to Leno. (a) Explain whether a valid contract exists between Leno Computers
and Fallon Electronics. (b) Assuming that Leno Computers has not yet delivered the
tablet computers to Fallon Electronics, what might cause a valid contract not to exist
between Leno and Fallon?
9. Hillside Company enters into a contract with Sanchez Inc. to provide a software license
and 3 years of customer support. The customer- support services require specialized
knowledge that only Hillside Company's employees can perform. How many
performance obligations are in the contract?

10. Ismail Construction enters into a contract to design and build a hospital. Ismail is
responsible for the overall management of the project and identifies various goods and
services to be provided, including engineering, site clearance, foundation, procurement,
construction of the structure, piping and wiring, installation of equipment, and finishing.
Does Ismail have a single performance obligation to the customer in this revenue
arrangement? Explain.