Financial Reporting & Analysis Case Assignment
PURPOSE -
This case is designed to continue to develop your research and writing skills. These skills are critical for a successful career in accounting or finance. This case will account for 10% of your grade in accordance with the syllabus. Your grade for this assignment will be based on the technical accuracy of your responses, the thoroughness of your research and analysis, as well as the clarity and organization of your writing. Note that there may be more than one acceptable answer to some questions so your reasoning and your ability to use GAAP to support your arguments are extremely important. You can choose to work on the assignment individually or with one team member of your choice. You may NOT discuss the case with anyone other than your team member or the professor. You will submit the case using "Turnitin" through Blackboard and you should also hand in a hard copy to me. Note if you are working with a team member, only one of you needs to submit the case via "Turnitin".
CASE FACTS
Fantastic Engineering Incorporated (FEI) is a public company with a calendar year-end. In its current fiscal quarter, ending December 31, 2016, it entered into a sales agreement with Beverage World Limited (BWL). Under the sales agreement, FEI is selling an assembly line system to BWL that consists of the following four components:
- Conveyor
- Filler
- Capper
- Labeler
FEI will install the assembly line system at BWL's Newark manufacturing facility, where it will be used by BWL to manufacture bottled beverage. The sales agreement between FEI and BWL provides for the following details:
Conveyor - $ 30,000
Filler - 22,000
Capper - 15,000
Labeler - 8,000
Installation for all four components - Free
Total - $75,000
The sales agreement is dated December 15, 2016.
Customers rarely purchase the Conveyor, the Filler and the Capper separately because the three segments cannot be used in production without each other. If any of the three segments breaks down, most companies would choose to replace all three segments together.
FEI delivers the first two components of the assembly line system on March 20, 2017, and agrees to deliver the Capper by the end of May. The capper normally should be delivered together with the Conveyor and the Filler. However, the delivery date for the Capper is delayed because FEI does not have that component of the assembly line system on hand at the time the sales agreement is entered into. As such, FEI has to manufacture that component of the line. Because of the backlog of orders FEI has in its manufacturing department at the time it enters into the sales agreement with BWL, it cannot commit to delivering the Capper segment to BWL until the end of May. FEI actually delivers the capper segment on May 26, 2017. Three technicians come to BWL's Newark facility and install the three components on June 2, 2017. The installation service does not require any modification of the assembly line.
The last component of the assembly system (i.e., labeler) is custom-designed for BWL to make special labels for BWL's products. BWL has an old labeler that is still in good condition but they decide to order a new one from FEI to satisfy their new marketing strategy. The new labeler can be used independently in production without the rest of the assembly line; it can also be installed on the company's old assembly line and work together with the existing Conveyor, Filler and Capper. The going market price for custom-made labeler is $8,500. Both FEI and a few of its competitors sell labeler to their customers. FEI starts to work on the labeler shortly after the sales agreement is signed. The labeler is half-done by the end of December 2016 but is actually delivered to BWL on January 15, 2017. A technician hired by FEI installs the labeler for BWL on the same day.
FEI itself does not provide or sell installation services. FEI contracts with outside technicians to provide installation to customers who purchase FE I's assembly systems. A few independent contractors in the area provide installation services. FEI has heard from a prior customer who hired an outside technician charged $2,500. The condition under which this fee is charged is unknown to FEI. A few of FEI's competitors in the east coast also provide installation services for a fee upon requests. FEI has never sold installation service without this particular assembly line before, however, they have sold installation and maintenance service for other types of machine/assembly lines and they typically earn 20¢ profits for each dollar they sell.
FEI requires cash upon delivery to BWL, so BWL pays the prices listed in the sales arrangement as the items are delivered. That is: on January 15, 2017, BWL pays FEI $8,000 for the labeler; on March 20, 2017, BWL pays FEI $52,000 for the Conveyor and the filler; on May 26, 2017, BWL pays FEI $15,000 for the capper. These amounts are not refundable under normal circumstances.
FEI sells the entire assembly line system with free installation service but also offers their customers the option of purchasing the assembly line without installation service for $73,500 (in which case the customer will need to hire an independent contractor themselves). Most customers choose to purchase FEI's assembly line with installation service. FEI also sells the conveyor, the tiller and the capper without the labeler or installation for $68.000.
In addition to the above information, FEI also provided their inventory and installation costs associated with fulfilling the arrangement with BWL:
Cost
Conveyor $22,000
Filler 11,000
Capper 8,500
Labeler 4,500
Installation 1,200
Total: $47,200
CASE REQUIREMENTS -
FEI is concerned with revenue recognition issues related to its sales agreement with BWL. In its deliberations, FEI asks for your help. Prepare a memo addressing the following questions. Base your analysis of the following questions on the relevant authoritative literature, particularly the FASB Accounting Standards Update No. 2014-09. Discuss the support in that literature for your conclusions and he sure to cite the relevant components of the Codification (available at: https://aaahq.org/FASB-GASB) in your discussion. Conclusions reached in applying the authoritative literature to the case facts are the most convincing. Citations are not required for journal entries.
1. How many performance obligations can you identify in the sales agreement between FEI and BWL? Use the authoritative literature and cite the Accounting Standard Codification (ASC) number(s) to explain your answer.
2. If you need to determine the standalone selling price for installation service, can you use the price charged for installation that FEI heard about from a prior customer (i.e., $2,500)? What type of analysis must be done in order to determine if the $2,500 is the appropriate price level? Please be specific. Explain your answer and cite the ASC numbers.
3. Assuming that sufficient evidence exists to support $2,500 as the standalone selling price for installation service, how to allocate the transaction price (i.e., the lump sum price charged by FEI) to each performance obligations? Explain your answer and cite the ASC numbers.
4 For each performance obligation you have identified in this contract, specify whether you are able to recognize revenue at a point in time or over a period of time. Explain your answer and cite the ASC numbers. If you believe certain performance obligation(s) are satisfied over time, help FEI determine the method it can use to measure progress toward completion. Explain your answer and cite the ASC numbers.
5. If there are no other issues that would affect the timing of revenue recognition, how much revenue and cost of goods sold (if any) should be recognized in the following periods? Include journal entries in your answer. (Assume that sufficient evidence exists to support $2,500 as an appropriate estimate of the standalone selling price of the installation services).
a. The quarter ending December 31, 2016?
b. The quarter ending March 30, 2017?
c. The quarter ending June 30.2017?
6. Now assume that NO sufficient evidence exists to support the usage of $2,500 as an appropriate estimate of the standalone selling price of installation, what other approach (es) you can use to estimate the standalone selling price of installation? Cite relevant literature and ASC numbers to support your argument. When you use this alternative approach, how much revenue should be recognized in the following periods? (No need to include journal entries again)
a. The quarter ending December 31, 2016?
b. The quarter ending March 30, 2017?
c. The quarter ending June 30, 2017?
Note: there could be more than one acceptable answers to several questions above. Those who are able to articulate why their answers are preferable to the alternatives will score higher on the case assignment.
FASB ACCOUNTNG STANDARDS CODIFICATION
On July 1, 2009, the Financial Accounting Standards Board (FASB) instituted a major change in the way accounting standards are organized. On that date, the FASB Accounting Standards Codification (FASB Codification) became the single source of authoritative, nongovernmental U.S. generally accepted accounting principles (U.S. GAAP). Now, only one level of authoritative U.S. GAAP exists, other than guidance issued by the Securities and Exchange Commission (SEC). All other literature will be non-authoritative.
As part of its educational mission, the Financial Accounting Foundation (FAF), the oversight and administrative body of the FASB, in a joint initiative with the American Accounting Association (AAA), is providing faculty and students in accounting programs at post-secondary academic institutions with the Professional View of the online FASB Codification.