Task 1

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School

Western Governors University *

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Course

D252

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Accounting

Date

May 11, 2024

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docx

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Spencer Rodrigues D252 Accounting Research A.) After reviewing the KTSB and Ramesses II agreement I have discovered the following accounting issues in their model. Model E sales recognition method: Characteristics of the agreement: Ramesses 2 purchased the model E from KTSB and will pass on the title to them. The products unsold for 90 days may be return. There was a specified time when they will receive the Model E which are they were bought on July 16 and will be shipped on August 23. The problem arises to recognize revenue by how and when they will be recognizing the sales for the model E. The accounting revenue issue: The biggest issue is when the exact time the full transfer will happen to move over to Ramesses 2. The reason is this is so important is because for the 90 days return the deciding factor of POD or OT is very important. Coupon and reimbursement: Characteristics of the agreement: In the deal there is a coupon for 100 dollars on the Model E and the coupon will expire in 90 days which will be redeemable at both companies. The main issue here is how they will recognize the revenue from the coupon and the possible reimbursement. The accounting revenue issue: This is essential on the recognition of revenue because if they need to decide the method for recognizing the price of the product. There will be 2 potential recognizing revenue in this solution which they will have to decide which is deduct from the price or not. How will they recognize the reimbursement if they choose to return those products within the 90-day period. Commission on gift cards: Characteristics of the agreement: The deal explains that the commission agreed to pay was 3 percent. The normal rate is 2.5 percent. The accounting revenue issue: The issues found in the commission is why it is 3 percent and if the company really provides that type of service. What type of difference will that affect the revenue with a higher commission rate. Warranty claims: Characteristics of the agreement:

KTSB is letting Ramesses 2 accept warranty claims for the computers for the first year when the product was bought. This will affect the revenue recognition because of the extra costs of shipping the product to KTSB and other similar costs. The accounting revenue issue: The issue with the warranty claims is that there are additional costs per warranty claims like shipping. This accounting issue is a timing issue and of much of liabilities for these possible obligations that will come up. B.) Summary: We agree with Ramesses 2 to sell the product 300 Model E, which will help with major opportunities. The main points of the deal are as followed, the transfer of the title and the right to return the product in the 90-day period as agreed. The coupon that will give the product 100 dollars of the product which will be allowed to be redeemed in both Ramesses 2 and KTSB. The last item is the 3 percent commission to Ramesses 2 from the gift cards which in fact is higher than the industry normalized standard. Ramesses 2 will be accepting warranty claims within a year of purchased from customers which will add additional costs that needs to be put into consideration. Model E sales recognition method: Accounting issue: The issue with Model E sales recognition is that the exact time that the Model E will be transferred to Ramesses 2. A big reason why this is an issue is how they would recognize revenue when they will start recognizing revenue and this is confusing because if they don’t figure this out, they may over or under state revenue because recognizing revenue in the wrong point of time. This is essential too because of the 90 days return policy as well. Guidance: (FASB 606-10-25-1) “The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.” Analyze research: According to this section, the legal title must be specified because of the change of cash flow and accordance to this policy and if this is the case they need to factor in the contract with the customer and decide when they will be taking over the rights of the product, so they recognize revenue correctly. Recommendation:

The recommendation for this accounting issue is follow the instruction of point of delivery and when they reach those criteria, they will recognize revenue and must stay consistent with this form because the accounting must follow the criteria while recognizing revenue. Coupon and reimbursement: Accounting issue: The issue with the coupon is that they will take 100 dollars off the price so they will not overstate their revenue. This is important because if they ignore the 90-day coupon they can realize that will cause an issue with overstating revenue. How they will recognize revenue when they return the item how will they recognize the reimbursement? Guidance: (FASB 606-10-25-13) “The effect that the contract modification has on the transaction price, and on the entity's measure of progress toward complete satisfaction of the performance obligation, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue)” Analyze research: In this section this describes that a modification to the contract on the transaction price should not be recognized on revenue and should reduce revenue. This is the case because if they do recognize this as revenue then you will be overstating your revenue. Recommendation: The recommendation is not to recognize revenue when there is a discount for 100 dollars so that the revenue is being recognized correctly. This is important because if you recognize revenue with the 100 dollars off then this will affect the books by overstating revenue that was not really generated. Commission on gift cards: Accounting issue: The accounting issue is having a higher commission rate of 3 percent versus the 2.5 percent what affect will it have on the revenue account and how much of a difference will this make on the company? Guidance: (FASB 606-10-55-38) “When (or as) an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified goods or services to be provided by the other party. An entity's fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party.” Analyze research:

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