Question

Van Hatten Consolidated has three operating divisions: DeMent Publishing Division, Ankiel Security Division, and Depp Advisory Division. Each division maintains its own accounting system but follows IFRS.

DeMent Publishing Division The DeMent Publishing Division sells large volumes of novels to a few book distributors, which in turn sell to several national chains of bookstores. DeMent allows distributors to return up to 30% of sales, and the distributors give the same terms to bookstores. While returns from individual titles fluctuate greatly, the returns from distributors have averaged 20% in each of the past five years. A total of $7 million of paperback novel sales were made to distributors during fiscal 2020. On November 30, 2020 (the end of the fiscal year), $1.5 million of fiscal 2020 sales were still subject to return privileges over the next six months. The remaining $5.5 million of fiscal 2020 sales had actual returns of 21%. Sales from fiscal 2019 totalling $2 million were collected in fiscal 2020 less 18% returns. This division records revenue according to the revenue recognition method when the right of return exists.

Ankiel Security Division The Ankiel Security Division works through manufacturers’ agents in various cities. Orders for alarm systems and down payments are forwarded from agents, and the division ships the goods f.o.b. factory directly to the customers (usually police departments and security guard companies). Customers are billed directly for the balance due plus actual shipping costs. The company received orders for $6 million of goods during the fiscal year ended November 30, 2020. Down payments of $600,000 were received, and $5.2 million of goods were billed and shipped. Actual freight costs of $100,000 were also billed. Commissions of 10% on product price are paid to manufacturing agents after goods are shipped to customers. Such goods are covered by the warranty for 90 days after shipment, and warranty claims have been about 1% of sales. Revenue is recognized at the point of sale by this division.

Depp Advisory Division The Depp Advisory Division provides asset management services. This division grew out of Van Hatten’s own treasury and asset management operations, which several of its customers asked to have access to. On January 1, 2020, Depp entered into a contract with Scutaro Co. to perform asset management services for one year. Depp receives a quarterly management fee of 0.25% on Scutaro’s assets under management at the end of each quarter. In addition, Depp receives a performance-based incentive fee of 20% of the fund’s annual return in excess of the return on the S&P 500 index at the end of the year. At the end of the first quarter of 2020, Depp was managing $2.4 million of Scutaro assets. The annualized return on the portfolio was 6.2%. (The S&P 500 index had an annualized return of 5.7%.)

(a)

For each division’s revenue arrangements, identify the separate performance obligations, briefly explain the allocation of the transaction process to each performance obligation, and indicate when the performance obligations are satisfied.

Answer 1

Answer :

a.

DeMent recognizes revenue when it delivers books to distributors, which is when it satisfies the performance obligation. The transaction price for the arrangement is adjusted for the expected returns, unless no reliable estimate of returns can be developed. In that case the amount of revenue recognized will be constrained to amounts not subject to returns (70%) – until the returns are known.

Ankiel recognizes revenue when alarm systems leave the factory to be delivered to customers, which is when it satisfies the performance obligation related to product sales. Commissions are recorded as expenses and a warranty liability and expense are recorded for the assurance warranty.

Depp recognizes revenue over time as the asset management services are provided. The transaction price may be adjusted for the expected bonus payment. Since this is the first quarter of the fiscal year, none is accrued due to the uncertainty of realization.

b.

DeMent Publishing Division

Sales—fiscal 2020 ............................................................   $7,000,000

Less: Refund liability (20%).............................................. 1,400,000

Net sales—revenue to be recognized in fiscal 2020...... $5,600,000

Although distributors can return up to 30% of sales, prior experience indicates that 20% of sales is the expected average amount of returns. The collection of 2020 sales has no impact on fiscal 2020 revenue. The 21% of returns on the initial $5,500,000 of 2020 sales confirms that 20% of sales will provide a reasonable estimate.

Ankiel Securities Division

Revenue for fiscal 2020 = $5,200,000

The revenue is the amount of goods actually billed and shipped when revenue is recognized at point of sale (terms of f.o.b. factory). Orders for goods do not constitute sales. Down payments are not sales but unearned revenue when collected. The actual freight costs are expenses made by the seller that the buyer will reimburse at the time s/he pays for the goods.

Commissions and warranty costsare also selling expenses. Both of these expenses will be accrued and will appear in the operating expenses section of the statement of income.

Depp Advisory Division

Revenue for 1stquarter of fiscal 2020 = $6,000

($2,400,000 X .25%)

Depp is not reasonably assured to be entitled to the incentive fee until the end of the year. Although Depp has experience with similar contracts, that experience is not predictive of the outcome of the current contract because the amount of consideration is highly susceptible to volatility in the market. In addition, the incentive fee has a large number and high variability of possible consideration amounts. The calculation and recording of any bonus payment should be deferred until the end of the year when the performance is known, as it is subject to substantial volatility during the year.