PLEASE DON\'T COPY THE ALREADY EXISTING ANSWERS ON CHEGG. Case 16-2 The Cable Gu

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PLEASE DON'T COPY THE ALREADY EXISTING ANSWERS ON CHEGG.

Case 16-2 The Cable Guvs CoAx (the "Company"), a publicly traded company, manufactures and sells coaxial and fiber-optical cable. CoAx is contemplating two separate transactions for which it is evaluating the appropriate revenue recognition Transaction 1 CableCo, a customer of CoAx, has entered into a binding written agreement to purchase 1,000 feet of 18 American wire gage (AWG) coaxial cable for $3 per foot. Because CableCo is constructing a new warehouse, it is unable to take delivery of the cable and has requested in writing that CoAx store the cable in its warehouse until construction of CableCo's warehouse is completed. CableCo's warehouse will be completed three months from the time of purchase, at which time CableCo is required to take delivery of the cable. CoAx stores 18 AWG coaxial cable in 10,000-foot spools (spools of cable are considered finished goods and ready for shipment). CoAx will not physically segregate the cable that CableCo will purchase; rather, the Company will designate the quantity in its inventory tracking system as "sold," thereby preventing the use of the cable to fulfill other customer orders. In other words, CoAx will "virtually" segregate the inventory CoAx and its auditors have concluded the following with respect to the arrangement with CableCo

Explanation / Answer

Transaction 1 It is appropriate for CoAx to recognise revenue before the date Cable Co. takes delivery To be exact, CoAx can recognise revenue on the basis of the following: Binding written agreement from CableCo.to purchase the specified quantity of goods at the specified & agreed price. So, the transaction price is known & determinable. Also,written information from CableCo regarding the inability to take delivery ,for a maximum of 3 months,until completion of their warehouse. The said goods are no more available for future sale to any other customer. The performance obligation, in the case, is to hold the said goods tii CableCo.takes delivery of the goods Under the new standard--ASC 606 , the main point is when control over the goods changes, not when there’s a transfer of the risks of ownership. At this point also, Cable Co. has the control to direct CoAx , to do as they wish , even though the goods are in the physical custody of CoAx. So,the effective control ,is with CableCo. This is more or less ,a credit sale where acceptance to purchase has taken the place of an invoice ---so there is reasonable-ness in believing that sale had taken place& revenue had been earned. Transaction 2 It is only appropriate for CoAx to recognise revenue with respect to the inventory ,once the goods are in the physical custody of the carrier, DeliveryAx. To be exact, CoAx can recognise revenue on the basis of the following: Binding written agreement from CableCo.to purchase the specified quantity of goods at the specified & agreed price--- also on FOB shipping terms agreed. Payment has also been received. And the performance obligation ,of handing over to the carrier ,is met. Only that part of recognising the revenue--with respect to transportation, has to wait until the goods are delivered to TeleCo. Under the new standard--ASC 606 , the main point is when control over the goods changes, not when there’s a transfer of the risks of ownership. After the point of shipping,TeleCo. has the control to direct CoAx , to do as they wish--may be to redirect the goods to one of its customers straightaway ---- even though the goods are in the physical custody of the Company fully owned by CoAx. So,the effective control ,is with TeleCo-- which has knowingly availed this service from CoAx. The 5 steps to recognising revenue as required under ASC 606 are 1.Existence of promise/contract to deliver goods or service --as in the above 2 transactions which specifies the agreement to purchase specific goods, specific quantity & price & also terms of delivery 2.. Identifying distinct performance obligation on the part of the seller- to store goods till the buyer is ready as in the 1st case, or to deliver to the carrier, as in case 2 3..To determine the exact price of the transaction --so that they can be monetaril y expressed in seller's books of accounts 4. Identifying & allocating value to the goods /services according to the level of contracted obligation performed --as in case 1--performance obligation being keeping the goods in the seller's(CoAx) custody ,till CableCo readied his warehouse or as in case 2--handing over the goods to the shipping carrier/dock. 5.Recognise the relevant and appropriate revenue --- $ 1000*3= $ 3000 in case 1 & $ 1500*3= $ 4500 in case 2

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