Case: Excello Telecommunications has been profitable for many years but recently has been faced with increased competition for its products by overseas manufacturers. For the first time in the company's history, it appears that earnings estimates will not be met. Top management is concerned about the effect on bonuses, stock options, and the share price of Excello stock. That is when Terry Reed, the CFO, learns of a transaction on December 20, 2010, that might solve the problem. On Dec 20, 2010, Excello sold $1.2 million of equipment to Data Equipment Systems. Typically, this type of transaction would be recorded as a sale on the date of shipment. However, the customer requested that Excello hold on to the product until January 11, 2011, because Data Equipment lacked the warehouse capacity to hold the product until then.
On December 30, Reed approaches the controller, Marty Fuller, to discuss the dilema. Fuller explains the rules in accounting for sales where the goods are held for future delivery. Reed undertands the rules, but tells Fuller he needs to come up with a creative way around the rules so that the $1.2 million can be recorded as revenue in 2010.
Fuller calls a meeting of the accounting department to discuss what can be done. He emphasizes two important points. First, the $1.2 million must be recorded in 2010. Second, whatever is decided it must be defensible from a GAAP point of view. The team comes up with the following alternatives: (1) Transfer the product to an off-site warehouse owned by Excello by December 31 and hold it until January 11 when it would be shipped to Data Equipment. (2)Transfer the product to Data Equipment by December 31 and agree that the customer could return it for a full refund after it arrives at Data Equipment's warehouse. (3) Offer Data Equipment a 10 percent discount to take the product by December 31.
"Question": Evaluate the GAAP conformity of each of the three alternative transactions.
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