Assessing Revenue Recognition of Companies Identify and explain when each of the

Question

Assessing Revenue Recognition of Companies Identify and explain when each of the following companies should recognize revenue. a. The GAP: The GAP is a retailer of clothing items for all ages. b. Merck & Company: Merck engages in developing, manufacturing, and marketing pharmaceutical products. It sells its drugs to retailers like CVS and Walgreen. c. Deere & Company: Deere manufactures heavy equipment. It sells equipment to a network of independent distributors, who in turn sell the equipment to customers. Deere provides financing and insurance services both to distributors and customers. d. Bank of America: Bank of America is a banking institution. It lends money to individuals and corporations and invests excess funds in marketable securities. e. Johnson Controls: Johnson Controls manufactures products for the government under long-term contracts. Assessing Risk Exposure to Revenue Recognition (L01) Banner AD Corporation manages a Website that sells products on consignment from sellers. It pays these sellers a portion of the sales price, and charges a commission. Identify two potential revenue recognition problems relating to such sales.

Explanation / Answer

A. The GAP : It is a retailer of clothing items and directly sells to customers its merhandise. So it should recognise Revenue at the time of making sale.

B. Merck & Company : It should recognise its revenue when it sells its products to retailers because it gets either cash or claim to cash against sales.

C. Deere & Company : Deere should recognise its revenue when it sales the equipments to distributors and customers.

D. Bank of America : It should recognise the revenue when it performs the services for the customer aur it had gained right to collect the revenue from the customer.

E. Johnson Controls: Johnson manufactures under long term contracts. Hence he should recognise his revenue on percentage of completion method. Because he cannot provide the whole service in the year of contract and also if all revenue will be recognised only in one year then its leads to profit in one year and loss in others, due to which the information disclosed will be improper.

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