Question

Mesmerizing Marketers (MM) is a marketing company that offers a variety of marketing
offerings to its customers. Specifically:
• MM will create a TV commercial for $1M, build an app for $500K, and build a Facebook
page for $250K. These amounts represent MM’s charges for these items when MM 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 amount owed to MM
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 MM.
Stone, a customer, approaches MM with the hopes of reinventing its image to a younger
customer base. Stone has a verbal agreement with MM that is based on MM’s unsigned quote to
Stone on November 30, 20X5, for one TV commercial, one app, and a Facebook page for total
consideration of $1.5M and payment terms noted above. The agreement creates enforceable
rights and obligations pursuant to MM’s customary business practices. None of these items can
be redirected by MM to another customer. MM performed a credit check on Stone and has
determined that Stone has the intention and ability to pay MM for fulfilling its portion of the
contract. Stone is required to pay MM for performance completed to date if Stone cancels the
contract with MM for reasons other than MM’s failure to perform under the contract as
promised.
Stone makes a payment on November 30, 20X5, in the amount of $750K (50% of total
consideration of $1.5M) pursuant to the agreement. From the date of the quote, it takes MM 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. MM 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, MM
has determined that it takes over three months for Stone’s users to begin to download its apps.
Required
MM’s CFO is trying to understand the new revenue recognition model and has asked you to
explain how MM would account for the above scenario under the new standard.
1. How should MM account for the above offering with Stone under the new revenue
recognition model?
Case 17-7c: Mesmerizing Marketers Page 2
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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. MM 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

1. M should recognise the revenure from his offerings on the basis of the percentage of contract completion method & based on the % of service completed principles. As of November 30, 20x5, MM should recognize 50% of the revenue at the start of the contract as in the case.

1. a ) If app reaches 500K downloads in the first month, then MM will be entitled to recognize the one-time bonus of $250K on March 31, 20x6. ( i.e. 30 Nov. + 3 Months development & 1 month download).
2. b) If it is probable that bonus will accrue and revenue recognised will not be reversed, then MM would recognize the revenue on the basis of the percentage of each performance obligation.

Items	Stand-Alone Price	% of Total	Allocated Price	Allocated Bonus	Total
Facebook Page	250,000	14.29%	214,286	35,714	250,000
App	500,000	28.57%	428,571	71,429	500,000
TV Commercial	1,000,000	57.14%	857,143	142,857	1,000,000
Total	1,750,000	100.00%	1,500,000	250,000	1,750,000

Notes:- For bare standard refrences:-

1. Refer to ASC 606-10-05-4 (Five-step revenue recognition process)
2. Refer to ASC 606-10-32-8 (Estimating Variable Consideration)
3. Refer to ASC 606-10-55-16 (Methods for measuring progress toward complete satisfaction of performance obligation).
4. Refer to ASC 606-10-32-28 (Allocating the Transaction Price to the Performance Obligation)
5. Refer to ASC 606-10-32-40 (Allocation of Variable Consideration).