1301054,1301055,1301056,1301057 FA Assignment CASE 5-3 JOAN HOLTZ (A) (4) Accretion There is no guarantee that current prices will

be carried forward in the future. Because of this uncertainty no revenue should be recognized until an actual sale is established. Also, the owner has indicated his intention to sell in the following year as he can generate a larger profit then. (5) Unbilled receivables In the case firms like an architectural firm, a few high value or long term projects may be contributors to the revenue unlike manufacturing firms which produces large numbers of different products which are usually produced and sold within the operating cycle of the firm. In case of architecture firms, if the projects in process are recorded at cost, there may be an unrealistic spike in revenues of the firm when the project is eventually completed and billed for. Reporting of project in process as unbilled receivables rather than as inventory does make a difference to the reported owners equity as unlike the case of inventory where the revenue is not recognized, in this case the estimated revenue for the part of the project completed is recognized which increases equity. Also, if the rates at the final billing are different from that assumed during estimations, the difference may in turn affect the owners equity during billing. (6) Premium coupon An allowance should be made to the sales because redeeming of the coupons leads to reduction gross revenue from sales. The allowance should apply to sales revenue of tea as the associated expense is related to sales of tea and not coffee. (7) Traveler's Checks The bank would record the following upon sale of the travelers check: Cash increased by $505

Amount Payable to American Express is $500 Commission Revenue is $5 The bank would then reduce the liability (Amount Payable) and cash by $500 when making payment to American Express. American Express would record the following upon receipt of payment from bank: Cash increased by $500 Current Liability increased by $500. The liability and cash will decrease as the purchaser uses the checks.

(8) Product repurchase agreement Manufacturer A cannot record any revenue in 2010 because no sale has actually occurred. Under the revenue recognition criteria the risks and rewards of ownership have not been transferred. Management still has continuing involvement even after the sale in 2006. Hence it is not correct to record the sale. (9) Franchises The revenue of $10000 should be recognized once the franchisor has completed the material requirements related to the sale. This would mean that the initial revenue of $10000 be recognized after the firm has imparted the 1 week training course. If and when the market becomes saturated, if the profits decrease, then a portion of the initial fee should be deferred and amortized over the life of the franchise. This amount which has been deferred would be sufficient to cover the existing costs in excess of the continuing franchise fees and provide a reasonable profit on the continuing services.

(10) Computer Systems Because of a lot of uncertainty over cash collectability, since the sale is in a newly emerging market and there is a lack of proper laws and there are also issues related to foreign exchange when the payment is going to be made, it is advisable to recognize revenue as and when cash is collected and not in the beginning itself when the product is shipped.