The other extreme would be recognition of the

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The other extreme would be recognition of the insurance proceeds before verification of coverage or admission of liability by the insurance carrier. This is the most aggressive approach and the most likely to result in recognition of a gain contingency. There are two other alternatives: (1) recognition when the company has been able to determine that coverage exists and has been able to develop a minimum estimate of the amount to be recovered or (2) when the insurance carrier has admitted liability. A decision as to which of those alternatives should be used needs to be based on the company's ability to estimate the proceeds as reliably as possible. If the insurance company has admitted to a liability, Friendly Furniture would have a good basis for recognizing the minimum amounts subject to an evaluation of the reliability of the estimates and the probability of collection. One possible answer is to recognize insurance proceeds (a receivable from the insurance company) in Friendly Furniture's financial statements at June 30 in the following manner: credit a portion of business interruption insurance to cost of sales and recognize in other income a gain that consists of the estimated minimum amount that the replacement cost insurance proceeds exceed the net book value of equipment and inventory destroyed and unallocated proceeds from business interruption insurance. b. The auditor can perform the following procedures to support the amount recorded for the receivable: Examine the inventory records, including the perpetual and physical inventory, to determine the cost of the inventory destroyed by the flood. Examine the appraisal reports to test the fair market value of the inventory 10-11
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Chapter 10 - Auditing the Revenue Process destroyed. Examine the property, plant, and equipment subsidiary records to determine the cost (book value) of the equipment destroyed. Examine the appraisal reports to test the fair market value of the equipment destroyed. Examine the client's and insurance company's calculation of the amount of income to be recognized as a result of the business interruption. Solution to Internet Assignments 10-33 It is difficult to get information directly on some of EarthWear’s competitors. Lands’ End is now part of Sears. Eddie Bauer is part of The Spiegel Group. The Spiegel Group’s annual report states that revenue from catalog and e-commerce sales is recognized at time of shipment. They also disclose that they reserve for returns at the time of sale based on projected returns. Timberland reports that it recognizes revenue at the time of shipment, but there is no disclosure on returns. L.L. Bean and Patagonia are privately held companies and there are no publicly available financial statements. 10-34 A search of the SEC’s website should identify a recent company that has been cited by the SEC for revenue recognition issues. 10-12
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  • Spring '12
  • Na
  • Revenue, Generally Accepted Accounting Principles

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