Codification Research Case
Name
Institutional Affiliation
Course
Professor’s Name
Date
Codification Research Case
Question A
Revenue is recognized once all the conditions incidental to the sale are met, as shown in paragraph 605-15-25-1.
Question B
The right of return can be explained using this simple example. During regular business transactions, extraordinary situations may arise in a seller-buyer arrangement where there is the delivery of defective goods, damaged goods upon delivery or dispatch, or even delivery of the wrong product to a client. The right of return allows such a client to return the said goods to the seller or the manufacturer. Such a right has a limit, and it can be between one and five years, depending on the product. Bill and hold is an arrangement between a seller and a buyer where the seller invoices the buyer and retains custody of the goods until a later date. Such arrangements could occur because the buyer is not in a position to receive delivery of the goods.
Question C
In an accounting perspective recognizing revenue in a situation where there is a possibility of a right of return can be controversial. For such reasons, all companies should not recognize revenue until all conditions of the sale are met. Instead, they should provide a liability known as refund liability and adjust the liability at the end of each reporting period.
Question D
For revenue to be recognized, the seller has to transfer all ownership rights to the buyer. Some of the requirements include the goods should be maintained in the state they were at the date of sale; the customer should accept ownership of the products, and the goods are not transferrable to any other client once sold.
MEMO TO CLIENT
FROM:
TO:
DATE:
SUBJECT: Risks and Rewards of Ownership are Transferred in a Lease
A lease can be defined as an arrangement between two parties, a lessor and a lessee for transferring an asset for a specified period. Such arrangements bring about two types of leases, namely an operating lease and a finance lease. An operating lease is a type of lease where the lessor maintains all the leased item’s risks and rewards. Such risks and rewards include charging of depreciation and receipt of income associated with the asset. A financial lease is a type of lease where the lessee owns all the leased item’s risks and rewards and therefore recognizes two items in their books a right of use asset and a lease liability. Therefore it means that the lessee, in this case, charges depreciation and is in charge of regular maintenance of the leased item. Therefore, the lease agreement is usually more than a single year, and the value of the lease agreement can be determined by discounting the lease payments for the subsequent years, or it is predetermined through fair valuation.
To determine whether the risks and rewards are substantially transferred in a lease, one has to determine the type of lease it is. Most operating leases are for small items, and they are usually for a period of 12 months or less. In such a case, the lessee expenses the lease payments, and the lessor receives the lease payments as income. For a financial lease, it is usually for more than 12 months, and the lessee has the risks and rewards while the lessor has ownership of the leased asset. The lessee recognizes a right to use asset and charges depreciation on the asset over the lease or asset’s useful life and recognizes a lease liability. The lessor recognizes the lease payments as an income while in the lessee’s books, it is a payment.