Coconut Telegraph Essay Sample
- Word count: 787
- Category: contract
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Coconut Telegraph Essay Sample
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 of the hardware are needed for the hardware to work perfectly, it cannot be within the scope of ASC 985-605.
2.) On the basis of the response to Question 1, discuss the revenue recognition accounting literature that would be applied to each unit of accounting in the February 1, 2012, arrangement. Provide the cumulative revenue recognized and deferred revenue balance related to the Buffett arrangement as of April 30, 2012. Coconut’s February 1, 2012 arrangement with Buffet is within the scope of ASC 605 and therefore the Volcano System and the PCS will be accounting for separately. The guidance for multiple-element arrangement, ASC 605-25-15-2a, says that revenue for different deliverables in a single arrangement should be accounted as separately if “The delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if any vendor sells them separately or the customer could resell the delivered item or items”. Both the Volcano System and PCS have standalone relative selling price of $12,000 and $2,000 relatively and they could be purchased separately. Therefore, it is appropriate to account for the Volcano System and the PCS as separate units of accounting and use VSOE to determine the amount of revenue to be recognized.
February 1, 2012
To record the payment received:
Unearned Revenue $12,000
April 30, 2012
To record the delivery of Volcano System:
3.) . Should the February 1, 2012, agreement and the May 1, 2012, agreement be accounted for separately or as a single arrangement?
According to ASC 605-25-25-3, if the vendor and the buyer engage into separate contracts for the same entity at relatively close times, it is presumed to be negotiated as a package and will be treated as a single arrangement. That presumption may be changed if there is enough evidence proving the opposite. Therefore, because the contracts are closely related to one another and happening nearly at the same time, they should be accounted for together.
4.) On the basis of the response to Question 3, how should Coconut account for the execution of the May 1, 2012, agreement? Provide the deferred revenue balance and cumulative revenue recognized related to the Buffett arrangement upon execution of the May 1, 2012, agreement.
Cumulative revenue recognized as of May 1, 2012
+ 2862 months of PCS from previous contract (1,714/12 = $143 each month) $10,572 Total revenue recognized from February 1 contract
Deferred Revenue by May 1, 2012
$1,428Remaining unearned revenue from first contract for PCS
+2,700Training service from second contract
+1,800PCS from second contract
5.) Identify the IFRS literature applicable to the Buffet arrangement IAS 18 prescribes the accounting requirements for when to recognize revenue from the sale of goods, services, and for interest, royalties and dividends. It says that revenue should be recognized until is both realizable and earned. Also, revenue is measured at the fair value of the consideration received or receivable and recognized when certain conditions are met which depend on the nature of the revenue.
The arrangement on February 1, 2012 should be accounted for as a single arrangement. IFRS requires two or more transactions to be considered a single arrangement when “they are linked in such a way that the commercial effect cannot be understood without reference to series of transactions as a whole”.