CASE 1
The Sea-Soft Water Company distributes its water softeners to dealers upon their request. The contract agreement with the dealers is that they may have 90 days to sell and pay for the softeners. Until the 90-day period is over, any softeners may be returned at the dealer's expense and with no further obligations on the dealer's part. If the water softeners are damaged while in the hands of a dealer, Sea-Soft agrees to accept the return of the damaged softeners with no obligation to the dealer. Past experience indicates that 75% of all softeners distributed on this basis are sold by the dealer. In June, 100 units are delivered to dealers at an average billed price of $800 each. The average cost of the softeners to sea-Soft is $600. Based on the expected sales, Sea-Soft reports profit of $15,000.
Evaluate Sea-Soft's revenue recognition policy for its compliance with GAAP.
What recommendations would you make?
CASE 2
Many large electronics manufacturers offer very easy credit terms when a customer purchases their products. For example, Sony often offers its customers a "$0 down, no payments for 12 months" payment option when purchasing a big-screen television. In a case such as this, when would Sony recognize revenue - at the point of sale, when payments are begun (in 12 months), or proportionally as payments are made?
In no more than one page, discuss the pros and cons of each possible revenue recognition point and provide a conclusion as to when you believe a company, like Sony in this example, should recognize revenue.