Question

Required:

For each of the following independent scenarios, determine whether Van Allen Corporation is a principal or an agent for purposes of applying the 5-step revenue recognition model.

1. Van Allen is a broker facilitating the sale of goods and will receive a commission of 10% of the purchase price, which will be withheld from the proceeds at the closing of the transaction and paid to Van Allen.

2. Van Allen is an art dealer. It displays artists' work in its gallery and sells the works at prices determined by the artists. When a piece sells, Van Allen remits to the artist the sales proceeds less a fee. which is the greater of 15% of the purchase price or $300.

3. Van Allen is an art dealer. Van Allen pays a "base purchase price" to the artist for each piece it acquires. It displays the artists' work in its gallery and sells the works at prices it negotiates with the customers. When a piece sells, Van Allen remits an additional payment to the artist if the sales proceeds exceed three times the original base purchase price. The additional payment is 25% of the amount by which the sales proceeds exceed the base purchase price

Answer 1

What Is the Principal-Agent Relationship?

The principal-agent relationship is an arrangement in which one entity legally appoints another to act on its behalf. In a principal-agent relationship, the agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act. The relationship between the principal and the agent is called the "agency," and the law of agency establishes guidelines for such a relationship.

So let us examine who is the principal and agent in the three following cases:

1. Van Allen is a broker facilitating the sale of goods and will receive a commission of 10% of the purchase price, which will be withheld from the proceeds at the closing of the transaction and paid to Van Allen.

Ø Here Van Allen corporation is a broker which is appointed by any company to act the Van Allen on behalf of the company in the best of their interest. So we can say very clearly that here Van Allen is acting as an Agent.

2. 2. Van Allen is an art dealer. It displays artists' work in its gallery and sells the works at prices determined by the artists. When a piece sells, Van Allen, remits to the artist the sales proceeds less a fee. which is the greater of 15% of the purchase price or $300.

Ø Here also Van Allen acts as an agent, because the artists appoints the Van Allen to sell their works in the price prescribed by the artists. So here also we can see an agency relationship between Artists and Van Allen. So in this case also Van Allen is an Agent.

3. Van Allen is an art dealer. Van Allen pays a "base purchase price" to the artist for each piece it acquires. It displays the artists' work in its gallery and sells the works at prices it negotiates with the customers. When a piece sells, Van Allen remits an additional payment to the artist if the sales proceeds exceed three times the original base purchase price. The additional payment is 25% of the amount by which the sales proceeds exceed the base purchase price.

Ø Here Van Allen is an art dealer. He immediately pays the a base purchase price to artists for each piece it acquires. Here Van Allen is not acting as an agent as it is not selling the artworks according to the price prescribed by the Artists. But it negotiates with customers and sells the works if it is accepted by the Van Allen. And it creates a condition that if the art works is sold over the three times of base price to its customers, then it will give a 25% of the amount which exceeds the base purchase price. So in this scenario Van Allen is the PRINCIPAL.