Please write a report for both scenarios answering the questions listed in the “Your report should incorporate the following:” section (page #2). Please write the report as if you were reporting to the CFO of the company.
There are numerous sources that can be used. In addition to the Kieso, Weygandt, Warfield Intermediate Accounting 14th Edition text book, there are various accounting publications as well as Internet sources noted below:
•FASB www.fasb.org ( Check out the new FASB Codification research system)
•AICPA www.aicpa.org
•Wiley www.wiley.com/college/wallace
•Rutgers University www.rutgers.edu
Please write the report as if you were reporting to the CFO of the company.I will upload the Revenue Recognition Case for all information needed.
REVENUE RECOGNITION CASE
You are the Controller of a medium size Chemical and Machinery Company. The CFO has set up a meeting with you to discuss specific issues raised by the outside auditors about the Company’s revenue recognition policies.
The Controller’s Operating Standards Manuel reads as follows for revenue recognition:
For Sales of Product – recognize revenue when the product is shipped.
For Production Contracts – revenue is recognized for production contracts as deliveries are made. Losses are provided for contracts-in-progress in the period when such losses become probable.
The following two situations, which are considered material to the Company’s 2012 results, are being raised by the auditors:
Situation 1
In one of the Chemical Divisions, the auditors found a significant amount of inventory sitting in a trailer at year-end. The material represented an order that had been filled and was ready for shipment to the customer. When the auditors talked to the Division Controller, he confirmed the transaction and indicated they were following the Controller Operating Standards for revenue recognition. Since the product was already in the trailer, the Division considered it shipped and recorded the sale.
The auditors asked the Controller what the terms of shipment were for the transaction and he said he wasn’t sure but he would check. However, he also said he didn’t think that would make a difference because according to the Controller Standards, it should be recognized when it is shipped. They later found the terms of shipment were fob. destination –California (scheduled to arrive January 10, 2013).
Situation 2
The Company’s Street Sweeper Division, in December 2012, delivered twenty-five street sweepers to the City of New York. The contract with the City had the following provisions:
· The street sweepers would be delivered by year-end 2012.
· Acceptance of the street sweepers and payment by the City was contingent on the City confirming that the vehicles met the design specs outlined in the contract.
· If the vehicles did not meet design specs, the City would not accept them and they would be returned to the Company at the Company’s expense.
· If returned, the Company had three months to correct the deficiencies or the City had the right to cancel the contract and sue for any damages.
In early 2013, twenty-three of the twenty-five street sweepers were being returned for rework – the City informed the Company they did not meet the design specs, outlined the deficiencies in writing and reminded the Company they had three months to correct the deficiencies or they intended to cancel the contract and sue for damages.
(Continued on next page)
REVENUE RECOGNITION CASE ( CON’T)
The CFO is quite concerned about these two issues. She asked you for a report which addresses revenue recognition principles in general and what you recommend as actions that should be taken to remedy these situations.
Your report should incorporate the following:
· A recap of revenue recognition principles in general and for these two situations in particular, when can and should the Company recognize the revenue?
· What changes (if any) should be made to the revenue recognition definitions in the Controller Operating Standards?
· What accounting adjustments (if any) would you propose for each of these two situations including how to handle the possibility of being sued? (Assume the books are not yet closed and for situation 2, revenues were recorded when the deliveries were made in December, 2012.)
· What measures would you take to prevent each of these situations from occurring again? Address each of the following areas:
· Procedures to account for revenue when a contract includes an approval clause similar to Situation 2.
· Additional internal controls needed to insure proper revenue recognition
· Procedures in place to insure accountability for revenue recognition within the organization (include Production and Engineering as well as Finance.)
