Question

Media Mogul Inc.

Media Mogul Inc. is a marketing company that offers a variety of marketing offerings to its customers.

Specifically:

• Media will create a TV commercial for $1M, build an app for $500K, and build a Facebook page for

$250K. These amounts represent Media’s charges for these items when Media sells them separately to

customers. The TV commercial, the app, and the Facebook page are not interrelated; that is, each

functions independently of the other offerings.

• If a customer purchases all aforementioned items together, the total cost is $1.5M. Payment terms are

50 percent consideration due at contract signing, with the remaining 50 percent due over the rest of

the development period (25 percent at mid-point, 25 percent at completion).

• If the app is downloaded 500K times or more in the first month, there is a one-time bonus of $250K

payable to Media.

Stone, a customer, approaches Media with the hopes of reinventing its image to a younger customer base.

Stone has a verbal agreement with Media that is based on Media’s unsigned quote to Stone on November 30,

20X5, for one TV commercial, one app, and a Facebook page. The agreement creates enforceable rights and

obligations pursuant to Media’s customary business practices. None of these items can be redirected by

Media to another customer. Media performed a credit check on Stone and has determined that Stone has the

intention and ability to pay Media for fulfilling its portion of the contract. Stone is required to pay Media for

performance completed to date if Stone cancels the contract with Media for reasons other than Media’s

failure to perform under the contract as promised.

Stone makes a payment on November 30, 20X5, in the amount of $750K pursuant to the agreement. From the

date of the quote, it takes Media six months to develop and produce the TV commercial, two weeks to

complete the Facebook page, and three months to complete a fully functioning app. Media does not think that

the app will be downloaded 500K times in the first month because Stone’s customer base does not quickly

accept newly developed technology. On the basis of its experience with similar technology, Media has

determined that it takes over three months for Stone’s users to begin to download its apps.

Required

Media’s CFO is trying to understand the new revenue recognition model and has asked you to explain how

Media would account for the above scenario under the new revenue recognition standard.

1. How should Media account for the above offering with Stone under the new revenue recognition

model?

2.How would your conclusions change if:

a. The app sold to Stone is actually downloaded more than 500K times in the first month?

b. Media believed at the outset that there is about a 75 percent chance that the app will be

downloaded more than 500K times and it is probable that there will not be a significant

reversal of revenue?

Answer 1

SOLUTION:-

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