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Case 5–3
Joan Holtz (A)*
“Your course unfortunately doesn’t give me the answer 2. Retainer fee. A law firm received a “retainer” of
to a great many real-life problems,” said Joan Holtz to $10,000 on July 1, 2010, from a client. In return,
an accounting professor. “I’ve read the text and lis- it agreed to furnish general legal advice upon re-
tened to you attentively, but every once in a while I run quest for one year. In addition, the client would be
across something that doesn’t seem to fit the rules.” billed for regular legal services such as represen-
“Not all of life’s complications can be covered in a tation in litigation. There was no way of knowing
first course,” the professor replied. “As is the case with how often, or when, the client would request ad-
law, medicine, or indeed any of the professions, many vice, and it was quite possible that no such advice
matters are dealt with in advanced courses, and others would be requested. How much of the $10,000
are not settled in any classroom. Nevertheless, some should be counted as revenue in 2010? Why?
problems that are not specifically discussed can be 3. Cruise. Raymond’s, a travel agency, chartered a
solved satisfactorily by relating them to principles that cruise ship for two weeks beginning January 23,
you already have learned. Let’s take revenue recogni- 2011, for $200,000. In return, the ship’s owner
tion as a particularly difficult case in point. If you will agreed to pay all costs of the cruise. In 2010,
write down some of the matters about which you are Raymond’s sold all available space on the ship for
now uncomfortable, I’d be glad to discuss them with $260,000. It incurred $40,000 in selling and other
you—that is, after you have given some thought as to costs in doing so. All the $260,000 was received in
the most reasonable solution.” cash from passengers in 2011. Raymond’s paid
A week later, Holtz returned with the list given $50,000 as an advance payment to the ship owner
below. in 2011. How much, if any, of the $260,000 was
1. Electric utility bills. When an electric utility cus- revenue to Raymond’s in 2010? Why? Does the
tomer uses electricity, the electric company has question of whether passengers were entitled to a
earned revenues. It is obviously impossible, how- refund in 2011 if they canceled their reservations
ever, for the company to read all of its customers’ make any difference in the answer? Why?
meters on the evening of December 31. How does 4. Accretion. A nursery owner had one plot of land
the electric company know its revenue for a given containing Christmas trees that were four years
year? Explain. old on November 1, 2010. The owner had incurred
costs of $3 per tree up to that time. A wholesaler
* Copyright © Professor Robert N. Anthony. offered to buy the trees for $4 each and to pay in

Questions
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136 Part 1 Financial Accounting

addition all costs of cutting and bundling, and B. B used this inventory as collateral for a bank
transporting them to market. The nursery owner loan of $100,000 and sent the $100,000 to
declined this offer, deciding that it would be more A. Manufacturer A agreed to repurchase the goods
profitable to let the trees grow for one more year. on or before July 1, 2010, for $112,000, the differ-
Only a trivial amount of additional cost would be ence representing interest on the loan and compen-
involved. The price of Christmas trees varies with sation for B’s services. Does Manufacturer A have
their height. Should the nursery owner recognize revenue in 2010? Why?
any revenue from these trees in 2010? Why? 9. Franchises. A national real estate brokerage firm
5. “Unbilled” receivables. The balance sheet of an has become highly successful by selling franchises
architectural firm shows a significant asset to local real estate brokers. It charges $10,000 for
labeled Unbilled Receivables. The firm says this the initial franchise fee and a service fee of 6 per-
represents in-process projects, valued at the rates cent of the broker’s revenue thereafter. For this it
at which the customers will be charged for the ar- permits use of its well-known name and provides
chitects’ time. Why would a firm do this instead a one-week initial training course, a nationwide re-
of valuing projects in process at their cost, the ferral system, and various marketing and manage-
same as a manufacturing firm would value its in- ment aids. Currently, the franchise fee accounts
process inventory? Does it make any difference in for 25 percent of the national firm’s receipts, but it
the reported owners’ equity for the architectural expects that the United States market will be satu-
firm to report such in-process work as receivables rated within the next three years, and thereafter the
rather than as inventory? Why? firm will have to depend on the service fee and
6. Premium coupons. A manufacturer of coffee en- new sources of revenue that it may develop.
closed a premium coupon with each $2.50 (at Should it recognize the $10,000 as revenue in the
wholesale) jar of coffee that it sold to retailers. year in which the franchise agreement is signed?
Customers could use this coupon to apply to $0.50 Why? If it does, what will happen to its profits
of the price of a new type of instant tea that the after the market has become saturated? Why?
manufacturer was introducing and that sold for 10. Computer systems. In early 2010, the sales vice
$2.00 wholesale. The manufacturer reimbursed re- president of Tech-Logic reached agreement to de-
tail stores $0.60 for each such coupon they sub- liver several computer systems with a total price of
mitted. (The extra $0.10 was to pay the grocer for $570,000 to an organization in one of the newly
coupon handling costs.) Past experience with sim- independent countries established following the
ilar premium offers indicated that approximately dissolution of the former Soviet Union. Tech-
20 percent of such coupons are eventually re- Logic management was very excited about this
deemed. At the end of 2010, however, only about contract. The countries that were part of the for-
10 percent of the coupons issued in 2010 had been mer Soviet Union represented a major market that
redeemed. In recording the revenues for the com- was just opening up for trade, and these countries
pany for 2010, what allowance, if any, should be especially needed the kinds of high-technology
made for these coupons? Why? If an allowance products that Tech-Logic sold. Tech-Logic manu-
should be made, should it apply to the sales factured and shipped the entire $570,000 order
revenue of coffee or to the sales revenue of tea? during 2010. Tech-Logic normally recognized rev-
Why? enue on the sale of its products when they were
7. Traveler’s checks. A bank sells a customer $500 shipped. However, Tech-Logic’s controller won-
of American Express traveler’s checks, for which dered whether the same revenue recognition pol-
the bank collects from the customer $505. (The icy should apply to this contract. First, contract
bank charges a 1 percent fee for this service.) law in these countries was evolving and it was hard
How does the bank record this transaction? How to know if certain laws existed or what they were.
does the transaction affect American Express’s In addition, the controller was uncertain when
balance sheet? Tech-Logic would receive the $570,000 in cash.
8. Product repurchase agreement. In December 2010, He had heard that in many of these countries it was
Manufacturer A sold merchandise to Wholesaler difficult to obtain currencies needed for foreign
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exchange, although the customer kept assuring