Question

Mesmerizing Marketers (MM) is a marketing company that offers a variety of marketing offerings to its customers. Specifically:

MM a $1M, build $500K, build a$250K. amounts MM to the the arenot is, independently other a customer purchases all aforementioned items together, the total cost 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,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. 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 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. Answer the following circumstances

A) How should MM account for the above offering with Stone under the new revenue recognition model?

B) How would your conclusions change if: The app sold to Stone is actually downloaded more than 500K times in the first month?

C) MM believed at the outset that there is about 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?

Please show work and explain each letter answer please!!!

Answer 1

MM revenue recognition will be tv commercial =$1M

App = $500K

Facebook Page = $250K

If a customer will purchase all the three, the customer will affort $1.5M only

payments will pay at the beginning 50% at the mid 25% at the end 25% of the project development stages

On november 30,20x5, stone a customer willing to purchase all the three tv commercial, app, face book page.

The cost of all the three will be $1.5M. As per the contract terms 50% will pay at the beginning of the project.25% will pay at the mid of the project and 25% at the end of the project.

for tv commercial, to develope it takes 6 months and for face book page it takes to develop 2 weeks, for app developing it takes to develop 3 months. total time for the project will be 9months 2 weeks.

revenue generate at the starting of the project will be 50%=$750k

at the mid of the project 4months 4 weeks will be 25%=$375k

at the end of the project will be 25%=$375K

If the app sold to stone is actually download more than 500k times in the first month then a bonus will be payable to MM$250k. At this time total revenue will be $1.75M