611 case-version11.3

611 case-version11.3 - SUPER ELECTRONICS Inc FINANCIAL...

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SUPER ELECTRONICS, Inc.: FINANCIAL REPORTING OF SALES INCENTIVES AND VENDOR ALLOWANCES USING FASB CODIFICATION Case Analysis Wei Sun Siyu Zhang Yuanfei Zhao AC611 Section 1DA
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I. Analysis of Existing Accounting Policies for the Initiatives a. Membership fees In the case materials, we found that the company recorded all the entire proceeds of $7,200,000 (25,000 memberships x 12 months x $24 membership price) in net sales. It is definitely inappropriate for the company to recognize all the membership fees as earned revenue just under the receipt of the initial fee. The first reason is that the company has not realized the full obligations to provide service throughout the membership period. Statement 140 provides that liabilities may be derecognized only if (1) the debtor pays the creditor and is relieved of its obligation for the liability (paying the creditor includes delivery of cash, other financial assets, goods, or services or reacquisition by the debtor of its outstanding debt securities) or (2) the debtor is legally released from being the primary obligor under the liability. Rather, the seller's refund obligation is relieved only upon refunding the cash or expiration of the refund privilege. (FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities) In this case, the $24 is annual fee which means the company should provide the member a12-month membership service. What if the customer became a member not at the beginning of the fiscal year? If so, the company’s obligations deferred to the next fiscal year. The way SE Inc. recorded the membership revenue is based on the assumption that the company has already fulfilled the whole 12-month obligations which is obviously impossible. As we mentioned before, for instance, a customer became a member on July 2008 and paid 24 dollars for the membership at midpoint of the same month. The company should only recognize the 8/12 of the annual membership fee as SE only offered this member 8 month membership service from July to February 2009.
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Besides, the “complete satisfaction” guarantees policy brings an uncertainty about whether those memberships fee is fixed or determinable at any point before the end of fiscal. FASB Accounting Standard Codification 605-15-25-1 notes that, if an entity sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met. And one of the conditions is that the seller's price to the buyer must be substantially fixed or determinable at the date of sale. In addition, the code also points out that sales revenue and cost of sales that are not recognized at time of sale because the foregoing conditions are not met shall be recognized either when the return privilege has substantially expired or if those conditions subsequently are met, whichever occurs first. In this SE case, the Company is obliged to refund the fees for the any unused period of membership, if a customer is
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This note was uploaded on 03/02/2011 for the course AC 611 taught by Professor Keating during the Spring '11 term at Bentley.

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611 case-version11.3 - SUPER ELECTRONICS Inc FINANCIAL...

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