Case 17-7 Mesmerizing Marketers
Mesmerizing Marketers (MM) is a marketing company that offers a
variety of marketing offerings to its customers.
Specifically:
• MM will create a TV commercial for $1M, build an app for $500K,
and build a Facebook page for $250K. These amounts represent MM’s
charges for these items when MM 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 cost is $1.5M. 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 mid-point, 25 percent
at completion).
• If the app is downloaded 500K times or more in the first month,
there is a one-time bonus of $250K payable to MM.
Stone, a customer, approaches MM with the hopes of reinventing its
image to a younger customer base. Stone has a verbal agreement with
MM that is based on MM’s unsigned quote to Stone on November 30,
20X5, for one TV commercial, one app, and a Facebook page. The
agreement creates enforceable rights and obligations pursuant to
MM’s customary business practices. None of these items can be
redirected by MM to another customer. MM performed a credit check
on Stone and has determined that Stone has the intention and
ability to pay MM for fulfilling its portion of the contract. Stone
is required to pay MM for performance completed to date if Stone
cancels the contract with MM for reasons other than MM’s failure to
perform under the contract as promised.
Stone makes a payment on November 30, 20X5, in the amount of $750K
pursuant to the agreement. From the date of the quote, it takes MM
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. MM 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, MM has determined that it takes
over three months for Stone’s users to begin to download its
apps.
Required
MM’s CFO is trying to understand the new revenue recognition model
and has asked you to explain how MM would account for the above
scenario under the new standard.
1. How should MM 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. MM 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?
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