Question

When should each of the following companies recognize revenue for the following operations? Identify potential revenue recognition issues or risk exposures facing the company:

PLEASE ANSWER THE FOLLOWING QUESTIONS

a. Costco Wholesale Corporation collects annual membership fees from customers.

b. The New York Times receives advertising revenues in advance from Citigroup, for an ad campaign that will run a full-page spread once a week for six months.

c. Zappos is an online clothing and shoe retailer. It receives credit card payments when customers place their orders and ships products from warehouses within 5-7 business days.

d. Ticketmaster contracts with the producer of Blue Man Group to sell tickets online. Ticketmaster charges each customer a fee of $7 per ticket and receives $12 per ticket from the producer. Ticketmaster does not take control of the ticket inventory. Average ticket price for the event is $99.

Answer 1

a. Costco should record membership fees evenly over the year. A risk is that they might record all the fees as revenue when the customer makes the initial payment. This issue would not matter if cosctco receives about the same membership fees over the year.

b. The New york times should record the revenue as each ad appears (weekly). There is a potential risk that the company could record all of the advance payment as revenue when Citigroup pays it. This could be significant if advance advertising revenues are not uniform during the year.

c.Even though cash is received (credit cards are essentially cash), revenue should not be recognized until the product is shipped. Until that time, the cash received is recognized as an asset on the balance sheet and a liability (deferred revenue) is recorded to reflect an obligation to deliver product. Thus, one revenue risk is that zappos could record the cash receipts as revenue, before the product is delivered, to boost current sales and profit.

d. Ticketmaster should record $19($7+$12) revenue each time it sells a ticket. Of that $7 will be received in cash and $12 will be recorded as receivable from the Blue man group producers. The risk exposure is that Ticketmaster could record $106($99+$7) for each ticket sold and offset that with a cost of goods sold of $87 ($99-$12)(along with a $87 accounts payable) to the Blue man group producer. This would increase the company’s sales figure but would not have any effect on the profit beacuse still the profit remains same (106-87=19)

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