Revenue Recognition
Under what accounting standard is revenue recognition primarily governed in the U.S.?
ASC 606 - Revenue from Contracts with Customers
How long does Dynamic have to return unsold AM300 units to Larson?
60 days after May 31
Larson shares the cost of product demonstrations with Dynamic. This type of cost is typically recorded as this type of expense.
Marketing Expense
What kind of products does Dynamic primarily sell?
Durable goods, with some grocery items.
What is Larson’s best-selling product?
The AM300.
At what point in the transaction does legal title of the AM300 transfer to Dynamic?
At the point of delivery to Dynamic's warehouses
What risk was Larson concerned about if Dynamic discounted the AM300 too much?
It could harm the perceived quality of the product.
How should Larson account for the volume discount it offered Dynamic for purchasing more AM300s?
As a reduction in revenue
What promotional strategy is Dynamic known for in its warehouses?
Live product demonstrations similar to infomercials.
How many AM300 units did Dynamic initially agree to purchase?
1 million.
What feature of the agreement creates uncertainty about revenue recognition for the additional 1 million units?
Dynamic has not committed to purchasing them yet, making it uncertain when revenue can be recognized.
What compromise did Larson make regarding its manufacturer’s coupon?
It agreed to let Dynamic accept the coupon, but no other retailers.
How should Larson account for reimbursing Dynamic for warranty claims within the first year?
Warranty Expense
What is Dynamic’s return policy for customers with receipts?
Full refunds up to six months after purchase.
What price will Dynamic sell the AM300 for?
$249.99.
How does the volume discount in the agreement affect revenue recognition?
A potential retroactive discount must be accounted for when recognizing revenue.
What incentive did Larson give Dynamic for selling its gift cards?
A 3% commission on gift card sales, which is above the 2% industry standard.
Larson invoiced Dynamic for reserved inventory that Dynamic hasn’t yet accepted. Until the sale is finalized, Larson must classify the invoiced amount under this account.
Accounts Receivable
How does Dynamic encourage customers to use its store credit card?
It offers a 5% discount on purchases.
What percentage of Larson’s sales are expected to come from direct-to-consumer sales in the future?
50%
What are the five steps of revenue recognition under ASC 606?
Identify the contract, Identify performance obligations, Determine the transaction price, Allocate the price, Recognize revenue when obligations are met.
How did Dynamic mitigate its risk of carrying the AM300?
It negotiated return rights and price protection to avoid financial losses.
If customers don’t use the full balance of their Larson gift cards, the company can eventually recognize this type of revenue.
Breakage Revenue
Why did Dynamic agree to sell Larson’s gift cards?
To increase AM300 sales while earning commission on gift card sales.
What is the average percentage of customers who file accessory replacement claims under Larson’s warranty?
80%