Question

PeeDee Marketers (PM) is a marketing company that offers a variety of offerings to its customers.

Specifically:



PM will create a TV commercial for $2M, build an app for $1M, and build a Facebook page for

$500K. These amounts represent PM’s charges for these items when PM sells them separately

to customers. The TV commercial, the app, and the Facebook page are not interrelated; that is,

each functions independently of the other offerings.



If a customer purchases all aforementioned items together, the total amount owed to PM is

$3M. Payment terms are 50 percent consideration due at contract signing, with the remaining

50 percent due over the rest of the development period (25 percent at midpoint, 25 percent at

completion).



If the app is downloaded 500K times or more in the first month, there is a one-time bonus of

$300K payable to PM.

Stone, a customer, approaches PM with the hopes of reinventing its image to a younger customer base.

Stone has a verbal agreement with PM that is based on PM’s unsigned quote to Stone on November 30,

2019, for one TV commercial, one app, and a Facebook page for total consideration of $3M and

payment terms noted above. The agreement creates enforceable rights and obligations pursuant to

PM’s customary business practices. None of these items can be redirected by PM to another customer.

PM performed a credit check on Stone and has determined that Stone has the intention and ability to

pay PM for fulfilling its portion of the contract. Stone is required to pay PM for performance completed

to date if Stone cancels the contract with PM for reasons other than PM’s failure to perform under the

contract as promised. Stone makes a payment on November 30, 2019, in the amount of $1.5M (50% of

total consideration of $3M) pursuant to the agreement. From the date of the quote, it takes PM six

months to develop and produce the TV commercial, two weeks to complete the Facebook page, and

three months to complete a fully functioning app. PM does not think that the app will be downloaded

500K times in the first month because Stone’s customer base does not quickly accept newly developed

technology. On the basis of its experience with similar technology, PM has determined that it takes over

three months for Stone’s users to begin to download its apps. Required PM’s CFO is trying to understand

the new revenue recognition model and has asked you to explain how PM would account for the above

scenario under the new standard.

1. How should PM account for the above offering with Stone under the new revenue recognition model?

2. How would your conclusions change if:

a. The app sold to Stone is actually downloaded more than 500K times in the first month?

b. PM believed at the outset that there is about a 75 percent chance that the app will be

downloaded more than 500K times and it is probable that there will not be a significant

reversal of revenue?

Answer 1

1. As all three services are to be provided by PM to Stone with a composite price, Therefore the total time take for the completion of contract is 6 months and the revenue will berecognised accordingly, i.e 50% at the beginning, 25% at 3 months mark and rest 25% at the completion of the contract. If they were to be provided seperately with peperate prices then each service would have been adjudged accordingly.

2.

a. If the App sold to Stone is actually downloaded more than 500K times then at the as per the contract revenue of 300K should be recognised as and when it crosses 500k mark.

b.Revenue can only be recognised when there is absolute certainty of revenue generation. Anything less than absolue should not be recnognised.