ACCY500 Accounting Measurement,

Reporting and Control:

High Engagement Week 3
Question1: Revenue Recognition
1. Layaway Goodies recognises revenues from layaway transactions (putting merchandise
aside for customers who make partial payment) when the merchandise is placed on
layaway.

1.1. What do you think of Layaway Goodies’ revenue recognition policy? Does the
company face any unique issues in the recognition of expenses?

When people put goods in layaway with a deposit, they are no sure if they want to
buy it. Recognising it as revenue is a poor decision, as we do not record revenue till
the deal is completed, following the conservatism policy.

If clothes on layover are not finally purchased, the firm will have to reverse the entry
made, and change it based on the clients actual purchase.

1.2. Should Layaway Goodies use a different revenue recognition method if the customer
has made a firm commitment to buy the merchandise and Layaway Goodies does not
have to refund any money to the customer if (s)he does not buy the product? Justify
your answer.

Yes they should change their recognition method and record revenues only after the
sale is made. Even if they do not have to refund the money, the customer can choose
not to buy the item and choose another item. Hence It is best to wait till the
transactions is satisfied by both sides, before we record revenues.

2. OnlineDatabases provides customers with nonexclusive access to proprietary databases

on its website for a non-refundable annual fee. The company provides customers an
identification number and training in the use of databases; post-training, the company
incurs no incremental costs to provide services to its customers.
Discuss when OnlineDatabases should recognise revenue, along with any unique issues
that the company may face in the recognition of expenses.

Should recognize revenue on a monthly basis, over the time of the subscription.
3. Xerox often includes a service contract when it sells a copier (typically for one year).
How do you think Xerox should recognize the revenue of this sale?

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Question 2: Miscellaneous- Eastman Kodak Revenue
Recognition
Suppose that, on October 31, 2005, Eastman Kodak receives $5.3 million in cash from a
healthcare provider for a digital imaging service. The company will deliver the service to a
customer on January 3, 2006.

1. How will this transaction affect Eastman Kodak’s balance sheet at December 31,
2005? [Ignore any tax effects]

2. How will this transaction affect Eastman Kodak’s income statement for the fiscal
year ended December 31, 2005? [Ignore any tax effects]

3. What transaction will Eastman Kodak record when the service is delivered to the
customer on January 3, 2006?

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Question 3: Walmart- Sam’s Club Membership Fees
Recognition
Sam’s club is a chain of membership-only retail warehouse clubs owned and operated by
Walmart. Walmart company recognizes Sam’s club membership fee revenue both in the
United States and internationally over the term of the membership, which is 12 months. The
following table details unearned revenue, membership fees received from members and the
amount of revenue recognized in earnings for each of the fiscal years 2010, 2009, 2008.

Deferred
Membership
(Amount in Millions) Fee Revenue
Balance at February 1, 2007 $ 535
Membership Fees Received 1,054
Membership Fee Revenue Recognized (1,038)
Balance at January 31, 2008 $ 551
Membership Fees Received 1,044
Membership Fee Revenue Recognized (1,054)
Balance at January 31, 2009 $ 541
Membership Fees Received 1,048
Membership Fee Revenue Recognized (1,057)
Balance at January 31, 2010 $ 532

Using the information in the table, please answer the following questions.

1. What is the amount of Sam’s Club membership fees recorded as revenue for fiscal
year 2010?

$ 1057

2. How much of the membership fees recorded as revenue in 2010 is related to

memberships initiated or renewed during fiscal year 2009?

1057 – 541 = $516

3. What is the total amount of membership fees collected in fiscal year 2010 on
membership initiations and renewals? What percentage of these fees was also
recorded as revenues in 2010?

$1048.

b) 516 / 1048 = 49.24%

4. Suppose that an alternative accounting treatment of Sam’s Club membership

fees was to record them as revenues when memberships are initiated or renewed.

Had this alternative treatment been used would net income, total assets, liabilities
and shareholder’s equity in fiscal year 2010 be higher than, lower or the same as the
amounts currently recorded?
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 In alternative method, net income will be lower = $1048 vs. $1057.
Total assets will be the same. As cash is always collected.
Total Liabilities will be lower, as not deferred account is to be created.
Shareholders equity will be higher, as Lia is the same, but assets are higher.

Question 4: Reader’s Digest- Revenue Recognition

Reader’s Digest (RD) is a diversified media company that produces books, magazines and
other products. Their magazines are sold on a monthly basis and through subscriptions.

The Balance Sheet of Reader’s Digest is presented in the next page. Using the information
provided, please answer the following questions. Assume that the entire balance of unearned
revenues relates to magazine subscriptions.

1. When do you think that Reader’s Digest recognizes revenue for the subscriptions for its
magazines (Note: Subscribers pay for all subscriptions in cash in advance of receiving
them)?

Readers Digest recognizes revenue as they start to deliver the magazines on a monthly
basis.

2. As of June 30, 2003, what was the total value of magazine subscriptions that had been
sold, but that Reader’s Digest had not yet recognized as revenue?

414.8 + 127.6 = $ 542.4

3. Assume that the revenue recognized for magazine subscriptions during the year 2003 was
$1,845 million. Estimate how much RD collected during the year.

Opening Balance = 416.1 + 134.8 = 550.9

+ Cash Collection = ????

- Revenue Recognized = ( 1845 )

Ending Balance = 414.6 + 127.6 = 542.4

There fore, cash collection = $ 1836.5

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Consolidated Balance Sheets
In millions

At June 30, 2003 2002

Assets
Current Assets
Cash and cash equivalents $ 51.3 $ 107.6
Accounts receivable, net 256.5 295.2
Inventories 155.7 156.0
Prepaid and deferred promotion costs 132.7 140.9
Prepaid expenses and other current assets 191.8 153.2
Total Current Assets 788.0 852.9
Property, plant and equipment, net 162.5 168.1
Goodwill 1,009.4 1,004.0
Other intangible assets, net 212.3 240.6
Other noncurrent assets 427.3 426.3
Total Assets $ 2,599.5 $ 2,691.9
Liabilities and Stockholders' Equity
Current Liabilities
Loans and notes payable $ 31.3 $ 132.7
Account payable 97.5 102.8
Accrued expenses 281.4 283.2
Income taxes payable 36.5 28.4
Unearned revenues 414.8 416.1
Other current liabilities 19.7 6.8
Total Current Liabilities 881.2 970.0
Postretirement and postemployment benefits other than
pensions 121.9 128.1
Unearned revenues 127.6 134.8
Long-term debt 834.7 818.0
Other noncurrent liabilities 233.8 169.1
Total Liabilities $ 2,199.2 $ 2,220.0
Commitments and Contingencies (Notes 6, 11 and 13)
Stockholders' equity (Note 12)
Capital stock 17.6 25.5
Paid-in capital 215.0 224.6
Retained earnings 1,301.6 1,261.2
Accumulated other comprehensive (loss) income (109.2) (89.7)
Treasury stock, at cost (1,024.7) (949.7)
Total stockholders' equity 400.3 471.9
Total liabilities and stockholders' equity $ 2,599.5 $ 2,691.9

See accompanying Notes to Consolidated Financial Statement.