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Beginning Accounting, Case Study Example

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Case Study

What are the accounting issue(s) and the relevant components of the authoritative literature?

Revenue recognition is the main accounting issue in this case.  That is, ALI has agreed to sell CMI a total of three products plus installation: 1) mixer segment; 2) molding segment; 3) packaging segment.  Although ALI and CMI have agree on the purchase of these items, they raise several issues regarding revenue recognition.  These are: 1) the dates of delivery and installation of the various units are not the same; 2) The payment method for the products is cash on delivery; 3) other issues related to revenue recognition.

What are the separate units of accounting in the sales agreement between ALI and CMI? Use the authoritative literature to explain your answer.

The authoritative literature breaks up the issues in the following two typologies.  If the contract between the parties is expected to be completed, that is, if there are discrete milestones for the delivery and performance, then the contract should be allocated based on when the respective milestones are finished.  If, however, there are not discrete parts of the contract, or there is not confidence that the contract will be finished, then the contract should not be allocated until it is finished.

How much of the arrangement consideration should be allocated to each unit of accounting? Be sure to identify any other issues that must be resolved to determine how revenue should be allocated.

According to what is revealed in the various contracts, it would make sense for this case to allocate the revenue based on the completion of the discrete parts of the contract, rather than to allocate it all at the end. This is because there are clear sections of the contract that can be completed all at once and accounted for.

Now, assume that sufficient evidence exists to support the selling price of $95,000 for the assembly line system. However, there is some concern regarding the $12,000 charged for the installation services that ALI heard about from a prior customer. What type of analysis must be done related to the $12,000 price for installation services to decide whether it should be used to allocate revenue to the components in the sales agreement? Explain your answer.

For the issue of installation, there must be a full analysis conducted regarding the price of the installation and what component parts will be part of it. That is, the price of the installation must be properly allocated over the numerous products that will be installed at CMI over the life of the product.

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