QUESTION
Accounting
APA 7
The Final Paper is composed of four sections. The first three sections address revenue recognition that involves constraints. Accounting literature ASC 606 addresses revenue recognition and how to determine a transaction price when constraints are involved. The last section addresses asset liability obligations (ALO) which arise when future obligations must be recorded. The section addresses the future obligations that arise when a cranberry bog closes and the reclamation process starts. Document any information used from sources in APA style as outlined in the Ashford Writing Center’s Citing Within Your Paper (Links to an external site.) guide. The evaluation of the four sections will be graded using the following percentages:
Section 1: 10%
Section 2: 15%
Section 3: 25%
Section 1: Write one page. Read the first four pages in Variable Consideration and the Constraint (Links to an external site.), stopping at Diversity in Thought. Write a one-page report that addresses the bullets below. Your writing should reference the Accounting Standards Codification, Section ASC 606 using proper in-text citations. Include the following in your evaluation:
Describe variable consideration.
Explain what a company must do if a contract contains a variable consideration.
Identify the items in a contract that generally result in a variable consideration.
Explain the expected value and most likely approach.
Summarize the factors to be considered in the analysis when a reversal could occur and why they are important.
Section 2: Write one page.
Scenario: Absco, Inc., is a calendar year-end clothing manufacturer that sells exclusively to retailers. It engages in a large number of contracts with its customers. Absco signed a contract with Socks Are Us to ship 100,000 pairs of socks on December 27. The contract price is $5 per pair with nonrefundable payment due upon receipt of the socks. Absco immediately delivers the socks to Socks Are Us once the contract is signed by both parties with the socks arriving on December 28. However, Socks Are Us has not remitted payments as of December 31. It is clear to Absco that it will have to offer the customer a price concession in order to receive any payment at all. Absco has not had extensive dealings with Socks Are Us but estimates that it will need to offer a 25% discount.
Using the Accounting Standards Codification, Section ASC 606 as a source,
Identify whether Absco should recognize any revenue related to the transaction scenario in the current year.
Calculate how much.
Your answer and calculations should be one page and reference the Accounting Standards Codification, Section ASC 606 using proper in-text citations.
Section 3: Write one page with calculations.
Scenario: Absco signed a contract with Jeans Are Us to ship 300,000 pairs of jeans. The contract price is $20 per pair. These jeans are very fashionable at the current time but are not expected to stay in style for a long period of time. Because they are new, Absco has only manufactured 10,000 pairs. The contract specifies that Absco will immediately ship the 10,000 pairs and then will ship the remaining portions of the 290,000 pairs as soon as possible after a specific number of pairs are requested by Jeans Are Us. If Absco has shipped fewer than 300,000 pairs by the end of the year, it will ship the remaining jeans to fulfill the contract at the end of year one. Because Jeans Are Us is concerned that the demand for jeans will be heavy, it has provided an incentive in the contract for Absco to expedite production of the jeans. Jeans Are Us will provide a bonus to Absco if it delivers the jeans within a certain period.
The percentage bonus is as follows:
Delivered Within Percentage Bonus
1 day of request 5%
5 days of request 4%
10 days of request 3%
15 days of request 2%
Absco has never been involved in a transaction that involves bonuses for delivery expediency. In addition, because of the newness of the style of jeans on the market, Jeans Are Us is not able to give Absco any idea of when it will request jeans and how many it will request each time. Absco uses the expected value method of measuring variable consideration. Accordingly, it has determined that the expected value of the bonus consideration is $180,000. However, Absco is quite uncertain how quickly it can manufacture these jeans.
Using Accounting Standards Codification, Section ASC 606 as a source and the expected value method,
State the total transaction price with calculations in one page.
Your statement and calculations should reference the Accounting Standards Codification, Section ASC 606 using proper in-text citations.
Section 4: Write three pages with calculations.
Scenario: River Spray Company was organized to grow cranberries. They entered into an agreement with a landowner to lease 125 acres to develop a cranberry bog. The agreement states that River Spray will be obligated to transform the land back to its original condition at the end of the five-year agreement. Prior to receiving the permit, River Spray submitted a legally-binding plan that included a timetable for the full reclamation process. After the end of five years, River Spray will restore the land to its original condition.
River Spray has made the following estimates:
Labor costs to drain the bog are presently $22 hour but could increase anywhere between 7 and 14%.
The labor hours associated with draining the bog are approximately 10 to 15 hours per acre.
Labor costs to backfill the soil removed are estimated at 25 to 30 hours per acre.
The acreage will have to be reseeded, which will cost approximately $800 an acre.
Native tree seedlings will have to be planted at a cost of $20,000 and labor of $1,500 per acre.
An additional $200,000 to $300,000 is estimated for damages caused by air and water pollution.
Wildlife will also have to be restored at a cost of $150,000.
Overhead costs should be approximately 70% of total labor.
The risk-free rate is presently 2%.
Inflation is estimated to be approximately 2%.
Read the River Spray Company scenario. Using the PDF, Asset Retirement Obligations (pages A1-A6) as a source, in three pages,
State the amount PDC should recognize related to this asset retirement obligation.
Include an Excel schedule and calculations as presented in the Asset Retirement Obligations article.
Reference the Accounting Standards Codification, Section ASC 410-20 using proper in-text citations. You may want to review the Ashford Writing Center’s Citing Within Your Paper (Links to an external site.) web page for proper use of in-text citations.
The Final Paper
Must be five to seven double-spaced pages in length (not including title and references pages) and formatted according to APA style as outlined in the Ashford Writing Center’s APA Style (Links to an external site.)
Must include a separate title page with the following:
Title of paper
Student’s name
Course name and number
Instructor’s name
Date submitted
For further assistance with the formatting and the title page, refer to APA Formatting for Word 2013 (Links to an external site.).
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| Subject | Business | Pages | 7 | Style | APA |
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Answer
Accounting Standard Code 606
Section One
The third and final step in revenue recognition of a commodity is known as price determination. Price of a commodity is also known as a consideration. It is this stage that a term known as consideration. Variable consideration is therefore a consideration which can change depending on certain factors which are agreed upon between the seller and the buyer (Kral & Levy,2019). Variable consideration can come in numerous forms such as rebates, discounts, refunds, price concessions, incentives, bonuses which are based on the level of performance, rights of return among others. Variable consideration can be clearly spelt out in the contractual agreement. However, in the event that the seller and the buyers implicitly agree on variable consideration, the implied consideration will be legally recognized.
as has been stated above, consideration is part of the contractual conditions. Variable consideration is therefore part of the contract, that is required by law to be fulfilled by both parties engaged in the contract. Failure to owner variable consideration, amounts to breach of contract. the various components of variable consideration have the effect of making the final product cheap or expensive (Weiss, 2015). It is worth to note that variable consideration has the effects of reducing the realizable revenue on the side of the seller, as such it must be clearly defined in the contractual agreement. The expected value approach is actualized through establishing an array of consideration amounts. These amounts are usually gauged in terms of the weighted amounts, so as to realize a single number, which is a representation of the expected value of the subject consideration to be received by the final buyer. During analysis, the factors considered are the consideration, the compensation on timely or untimely completion, and the probability associated with completion times. These are important because they determine the amount payable by the buyer, as well as the amount receivable by the seller.
Section Two
According to the Accounting Standards of Codification (ASC) 606, revenue is recognized when the seller has transferred full control of the subject goods and services to the buyer (Loyd, 2018). Upon effecting of this transfer, the ownership of the good being sold changes hands from the buyer to the seller. Similarly, all the significant risks are then transferred from the buyer to the seller. At this stage, the revenue is assumed to have been earned by the seller, even if the buyer has not honored his or her part of the bargain. Since the socks have been supplied to Socks Are Us Limited, and the control of the goods have changed hands, Absco should recognize the revenue earned as per ASC 606.
Settlement of the stated consideration is part of fulfilment of contractual obligation. In the case at hand, Absco is has implicitly considered a consideration variation in terms of bonus, to enable the customer pay their consideration on time. The implied consideration is 25% discount. based on this, the total recognizable revenue ca be calculated as follows:
Total Revenue before discount
= 100,000 x $ 5
= $ 500,000
Implied discount = 25%
Therefore,
= 25% x $ 500,000
= $ 125,000
Recognizable revenue is 75% of the total initial consideration. This is calculated as follows:
= $ 500,000- $ 125,000
= $ 375,000
This amount can also be arrived as follows:
= $ 500,000 x 75%
=$ 375,000
Section Three
The expected value approach is usually carried out in order to establish the range of the possible consideration amounts. This is done by considering the various probabilistic weights or percentages associated with the various considerations (Lee, Sage & Shipe, 2020). The expected value helps the traders in ensuring that an accurate revenue is recognized and recorded in the financial records. This is because planning is usually done based on the expected value. The expected value in the various premises which are offered by the parties can be calculated and arrived at as follows:
|
Premise |
Calculated Expected Value |
Bonus on Top of the amount payable |
|
1 day of request 5% |
= $ 20 x 105% x 3,00,000 = $ 6,300,000 |
$ 3,00,000 |
|
5 days of request 4% |
= $ 20 x 104% x 300,000 = $ 6,240,000 |
$ 240,000 |
|
10 days of request 3% |
= $ 20 x 103% x 300,000 = $ 6,180,000 |
$ 180,000 |
|
15 days of request 2% |
= $ 20 x 102$ x 300,000 = $ 6,120,000 |
$ 120,000 |
As is evident from the above calculations, the bonuses which are considered by Jeans Are Us will have an effect of increasing the final consideration payable. Since these consideration variations have been implied, they form part of the contract, and must be fulfilled in the event that Absco manages to meet the set conditions. The $ 180,000 which has been estimated by Jeans Are Us is payable in the event that 10 days request at 3% is fulfilled by Absco Limited.
Section Four
The Estimated Cost of Transformation
- The approximate Labor Cost
- Draining of the Bog within 22 hours
The actual labor cost is actually 22. It is however, estimated that an increase of approximately 7 to 4% is likely to be realized. It is therefore prudent that an average increase be calculated as follows:
= (7% + 14%)/2
= 10.5%
The actual increase is therefore, calculated as follows:
= 22 x 10.5%
= 24.31
The increase expected 2.31 hours
- Calculation of Labor/Acre
The total acre reported is 125.
To bog this number of acres, it is estimated that the number of hours consumable will range between 10 and 15.
Therefore, the average number of hours = (10+15)/2 = 12.5
The total number of hours needed to bog the whole acres of land is calculated as follows:
= 125 acres x 12.5 hours
= 1,562.5 hours, or approximately 1,563 hours
- Soil Backfilling
It is estimated that between 25 and 30 hours will be used in backfilling the soil. The average number of hours to be used in backfilling the soil is arrived at as follows:
= 25 + 30/2
= 27.5 hours
Remember that the total number of acres to be backfilled is 125. The total number of hours needed to finalize the whole process of backfilling is calculated as follows:
= 125 x 27.5
= 3,437.5 hours approximately 3,438 hours
- Reseeding
It is estimated that every acre will cost $ 800
The total expenditure;
= 125 acres x $ 800
= $ 100,000
- Seedlings for Native Trees
Planting and labor will take $ 20,000 and $ 15,000 respectively
The total expenditure per acre on this item will therefore be as follows:
= $ 20,000 and $ 1,500 per acre
The total amount to be spent
= $ 20,000 + 125 x $ 15,00
= $ 207,500
- Cost of Pollution
The range is between $ 200,000 and $ 300,000.
The average figure for this item is as follows:
= $ 200,000 + $ 300,000/2
= $ 250,000
- Wildlife Restoration
To be done at $ 150,000
- Overhead Cost
Overhead is 70% of the total labor cost. This is calculated as follows:
Total labor = 1563+3438
= 5001
Therefore;
= 24.31x 5001
= 121,574
Hence; 121,574 x 70%
= 85,102
The Total Transformation Cost
= h+d+e+f+g
= 85,102 + 100,00 + 207,500 + 250,000 +150,000
$ 792,602
The present Value is calculated at a discounted value of 2%, which is the discounting rate.
= (1+2%/1+2%)-1
= 0
The real interest is 0%. This therefore, means that a nominal risks free rate can be used at 2% which is the inflation rate. This is evident from the above calculation
$ 792,602 (1+ 2%)-5
= $ 0.905731 x 792,602
=$ 717,884
This is the amount to be recognized as used in the retirement obligation. Similarly, the value of the leased land will be reported to the shareholders at the calculated amount. It is worth to note that the amount takes into consideration the time value of money. The time value of money is taken into account by including the inflationary effects in arriving at the recognizable amount. Therefore, the assets retirement obligation is $ 717,884.
According to Accounting Standards of Codification (ASC) 606 revenue that is realized as a result of leases should be recognized (Georgiades, 2019). The improvement in the value of leased asset is therefore recognized. this is however, done after taking into account the amortization effects. The amortization is calculated because an improvement in the value of a leased asset is recognized as an intangible asse. Amortization is done during the period in which lease agreement between the lessor and lessee is active between the two parties in the contact.
References
|
Georgiades, G. (2019). Auditing the Five-Step Model of FASB ASC 606, Revenue from Contracts with Customers. GAAS Update Service, 19(1), 1–8. Kral, R., & Levy, H. B. (2019). Selecting Modified Retrospective Transition for Adopting ASC 606 and Related Standards. CPA Journal, 89(9), 58–61. Lee, D. A., Sage, D. W., & Shipe, K. B. (2020). ASC 606 and Its Impact on the Franchise Industry. Franchise Law Journal, 40(2), 273–291. Loyd, B. (2018). ASC 606. California CPA, 87(5), 15–18. Weiss, J. (2015). Proposed Accounting Standards Update (PASU): Revenue from Contracts with Customers (ASC 606): Narrow-Scope Improvements and Practical Expedients. GAAP Update Service, 15(22), 1–8. |