Question

Transaction 2

TeleCo, a customer of CoAx, entered into a binding written agreement to purchase 1,500 feet of fiber-optical cable for $3 per foot. TeleCo’s shipping terms are freight on board (FOB) shipping point. CoAx collected payment before the order was shipped. Title transfers upon delivery to the carrier, and TeleCo will insure the product while it is in transit. Instead of using a third-party shipper such as FedEx and UPS, CoAx has decided to use its own logistics subsidiary, DeliveryAx, to deliver the cable to TeleCo.

* CoAx acquired 100 percent ownership interest in DeliveryAx in the previous year. DeliveryAx provides an array of shipping services to third-party customers outside the cable industry. Only 2 percent of DeliveryAx’s shipping revenue is expected to be derived from transactions with CoAx in the current year. Case 16-2c: The Cable Guys Page 2 Copyright 2015 Deloitte Development LLC All Rights Reserved.

1. Summarize transaction 2 in bullet points

Answer 1

Summary of Transaction 2

1..RECOGNITION Of REVENUE: CoAx can recognise revenue with respect to the inventory ,once the goods are in the physical custody of the carrier, DeliveryAx.

To be exact, CoAx can recognise revenue on the basis of the following:

Binding written agreement from TeleCo.to purchase the specified quantity of goods at the specified & agreed price--- also on FOB shipping terms agreed.

Payment has also been received.

And the performance obligation ,of handing over to the carrier ,is met.

Only that part of recognising the revenue( that too by DeliveryAx)--with respect to transportation, has to wait until the goods are delivered to TeleCo.

2.CONTROL OF GOODS: .Under the new standard--ASC 606 , the main point is when control over the goods changes, not when there’s a transfer of the risks of ownership.

After the point of shipping,TeleCo. has the control to direct CoAx , to do as they wish--may be to redirect the goods to one of its customers straightaway ---- even though the goods are in the physical custody of the Company fully owned by CoAx. So,the effective control ,is with TeleCo-- which has knowingly availed this service from CoAx.