Accounting literature ASC 606 addresses revenue recognition and how to determine a transaction price when constraints are involved. The last section addresses asset liability obligations (ALO) which arise when future obligations must be recorded. The section addresses the future obligations that arise when a cranberry bog closes and the reclamation process starts. Document any information used from sources in APA style as outlined in the Ashford Writing Center’s Citing Within Your Paper (Links to an external site.) guide. The evaluation of the four sections will be graded using the following percentages:
Section 1: 10%
Section 2: 15%
Section 3: 25%
Section 1: Write one page. Read the first four pages in Variable Consideration and the Constraint (Links to an external site.), stopping at Diversity in Thought. Write a one-page report that addresses the bullets below. Your writing should reference the Accounting Standards Codification, Section ASC 606 using proper in-text citations. Include the following in your evaluation:
Describe variable consideration.
Explain what a company must do if a contract contains a variable consideration.
Identify the items in a contract that generally result in a variable consideration.
Explain the expected value and most likely approach.
Summarize the factors to be considered in the analysis when a reversal could occur and why they are important.
Section 2: Write one page.
Scenario: Absco, Inc., is a calendar year-end clothing manufacturer that sells exclusively to retailers. It engages in a large number of contracts with its customers. Absco signed a contract with Socks Are Us to ship 100,000 pairs of socks on December 27. The contract price is $5 per pair with nonrefundable payment due upon receipt of the socks. Absco immediately delivers the socks to Socks Are Us once the contract is signed by both parties with the socks arriving on December 28. However, Socks Are Us has not remitted payments as of December 31. It is clear to Absco that it will have to offer the customer a price concession in order to receive any payment at all. Absco has not had extensive dealings with Socks Are Us but estimates that it will need to offer a 25% discount.
Using the Accounting Standards Codification, Section ASC 606 as a source,
Identify whether Absco should recognize any revenue related to the transaction scenario in the current year.
Calculate how much.
Scenario: Absco signed a contract with Jeans Are Us to ship 300,000 pairs of jeans. The contract price is $20 per pair. These jeans are very fashionable at the current time but are not expected to stay in style for a long period of time. Because they are new, Absco has only manufactured 10,000 pairs. The contract specifies that Absco will immediately ship the 10,000 pairs and then will ship the remaining portions of the 290,000 pairs as soon as possible after a specific number of pairs are requested by Jeans Are Us. If Absco has shipped fewer than 300,000 pairs by the end of the year, it will ship the remaining jeans to fulfill the contract at the end of year one. Because Jeans Are Us is concerned that the demand for jeans will be heavy, it has provided an incentive in the contract for Absco to expedite production of the jeans. Jeans Are Us will provide a bonus to Absco if it delivers the jeans within a certain period.
The percentage bonus is as follows:
Delivered Within Percentage Bonus
1 day of request 5%
5 days of request 4%
10 days of request 3%
15 days of request 2%
Absco has never been involved in a transaction that involves bonuses for delivery expediency. In addition, because of the newness of the style of jeans on the market, Jeans Are Us is not able to give Absco any idea of when it will request jeans and how many it will request each time. Absco uses the expected value method of measuring variable consideration. Accordingly, it has determined that the expected value of the bonus consideration is $180,000. However, Absco is quite uncertain how quickly it can manufacture these jeans.
Using Accounting Standards Codification, Section ASC 606 as a source and the expected value method,
State the total transaction price with calculations in one page.
Your statement and calculations should reference the Accounting Standards Codification, Section ASC 606 using proper in-text citations.
Section 4: Write three pages with calculations.
Scenario: River Spray Company was organized to grow cranberries. They entered into an agreement with a landowner to lease 125 acres to develop a cranberry bog. The agreement states that River Spray will be obligated to transform the land back to its original condition at the end of the five-year agreement. Prior to receiving the permit, River Spray submitted a legally-binding plan that included a timetable for the full reclamation process. After the end of five years, River Spray will restore the land to its original condition.
River Spray has made the following estimates:
Labor costs to drain the bog are presently $22 hour but could increase anywhere between 7 and 14%.
The labor hours associated with draining the bog are approximately 10 to 15 hours per acre.
Labor costs to backfill the soil removed are estimated at 25 to 30 hours per acre.
The acreage will have to be reseeded, which will cost approximately $800 an acre.
Native tree seedlings will have to be planted at a cost of $20,000 and labor of $1,500 per acre.
An additional $200,000 to $300,000 is estimated for damages caused by air and water pollution.
Wildlife will also have to be restored at a cost of $150,000.
Overhead costs should be approximately 70% of total labor.
The risk-free rate is presently 2%.
Inflation is estimated to be approximately 2%.