CASE No.

: 5-3:- JOAN HOLTZ CASE: ASSIGNMENT;6(A) FRA:

By Akhilesh kumar (PGEXP 2014-16, Roll : 02)
Reply to Query ;- 1: Electricity Utility Bills:
This is the case of an Electricity Supply company which has large consumer base spread
over in a specified region. Consumers are billed on the basis of electricity used during a
particular period. It is also difficult to do meter reading of all consumers as on 31
December.
In a situation like this the electricity company could recognize revenue in respect of all
bills (Latest raised) during December (From January to December) instead of bills to be
raised as on 31 December. However the Company should follow consistent accounting
policy and disclose the same in its Annual Report. In other word, if bills have been raised
between 10 Dec and 25 Dec, then all such bills raised to be recognized as revenue for that
financial year. Bills raised during January (Which contains part consumption during last
December) shall be considered as revenue for next financial year. Based on this analogy
electricity consumed during previous Dec part but bills raised during current January
shall be considered as revenue for the current financial year.
Reply to Query 2: Retainer Fee (Law Firm):
In the instant case it has been given that the Law firm has received $10,000 as retainer
ship fee on July 01, 2010 for providing advice for a period of one year. In addition to this
retainer ship fee the Law firm shall charge separate fee for representation of case before
the authority.
Presuming the the financial year of the Law firm ends on 31 December and retainer ship
fee is non refundable., then based on accrual concept the Law firm should recognize
$5,000 as revenue for financial year 2010 and balance $5,000 should be considered as
unearned revenue for F/Y 2011. In regard to representation fee the revenue should be
recognized based on representation made and billed to the client during the period when
such service is rendered.
Reply to Query 3: Cruise Receipt:
In the instant case we find that Raymond- a travel agency has hired a cruise ship for two
weeks starting on January 23, 2011 for $200,000. The contract with Cruise Company was
signed in the year 2010 for performance to be effected in year 2011. The travel agency
paid $50,000 as advance to Cruise Company in year 2011 before starting the voyage and
balance after completion of the voyage. Based on the contract so made in 2010 the Travel
agency sold out all tickets in 2010 for $260,000 but payments from passengers were
received in 2011. Meanwhile the Travel Agency in 2010 incurred $40,000 as sales
promotion expenses.

Here though the contract for chartering the cruise was made in 2010 but performance was
carried out in 2011. Similarly passengers were provided service in the year 2011.
Considering principle of conservatism and matching concept, the Travel Agency should
recognize its revenue only in year 2011 and its expenses either on chartering the ship
$200,000 or sales promotion expense $40,000 should be treated as expense for year 2011.
The profit $20,000 should thus be recognized in the year 2011. During year 2010 $40,000
expense on sales promotion could be treated as deferred revenue expenses under current
assets to be recouped in 2011.
If the contract between Travel agent and Passengers (executed in 2010 for service to be
rendered in year 2011) contains non refundable clause, still in my opinion under
conservatism and matching concept the Travel agency should not recognize any revenue
during year 2010.
Reply to Query 4: Accretion:
In the instant case it is given that a Nursery is engaged in raising Christmas tree. It has
four year old trees and its cost till date is @$3 per tree. After one year the tree would be
complete and marketable. The Nursery shall have to incur some additional cost during
one year period.
The Nursery during year 2010 had received an offer from a wholesaler to buy its partly
developed tree @$4 each and was ready to bear further costs to be incurred in bundling,
transporting etc. The offer of wholesaler has been turned down by the Nursery owner. As
Nursery owner has turned down the offer, therefore, no contract has been concluded and
nothing can be recognized as revenue during year 2010.
All expenses incurred in development of Christmas tree until they are sold should be
treated as work in progress and revenue be recognized in year 2011 as and when they are
sold.
Reply to Query 5: Unbilled Revenue:
This is the case of an Architectural firm that provides tailor made service to its client. The
service rendered by the firm differs with that of a manufacturing concern which usually
manufacture standard product. The standard product can be sold to any one whereas
architectural service is tailor made and cannot be used by any other client.
The contract between an Architectural firm and its client usually specifies treatment of
revenue in the account. In case of an Architectural firm period cost is significant than the
product cost and allocation and apportionment of period cost among various ongoing
projects is difficult to be ascertained correctly. Moreover a project undertaken by the
architectural firm may run into more than one year. The firm cannot follow completed
contract basis for revenue recognition if the contract execution takes two or more years.

The appropriate method is Percentage Completion Method and depending upon terms of
contract a firm usually treats work in progress in its Balance Sheet based on
predetermined rates fixed with the client. After completion of job the WIP is transferred
to Revenue Receipts in full and bal lance profit or loss is adjusted in the year of
completion of respective job.
Reply to Query 6: Premium Coupons:
In the instant case it is given that a Coffee Manufacturer while selling coffee jar to the
wholesaler @$2.50 each also provides discount coupon which could be used by the buyer
while buying Tea Pot. The coupon contains discount which a Retailer could claim
@$0.60 from the Manufacturer. The past experience of Manufacturer suggests that about
20% claims for discount are received. In the year 2010 however actual claim was 10%
instead of 20%.
The Manufacturer should make provision for 20% @0.60 per coupon at the time of sale
of Coffee. This provision should be maintained until the validity of Discount coupon
expires. During this period whatever claims are received they should be adjusted against
the provision and balance should be treated as Liability. While preparing Income
Statement for a particular period the Sales Revenue of Coffee should be recognized at
gross value and corresponding provision 20% of coupon @$0.60 should be treated as an
expense. After the expiry period the balance amount lying in the provision should be
transferred back to Income statement as Unclaimed Discount written back.
The provision for rebate should be linked with Coffee sales instead of Tea Sales based on
matching principle and its nexus directly with the sale of Coffee even though this may
lead to increase in sale of Tea.
Reply to Query 7: Travelers Checks:
In the instant case it is given that a commercial bank (Say A) sells American Express
Travelers check of $500 for $505. It earns service charge @1% on sale of Travelers
check.
Usually a travelers check once sold by a bank to its customer, the service charge so
collected is non refundable and customer can get $500 from any bank in lieu of check so
issued.
The Service charge so received is recognized as revenue instant by the selling bank A in
its Income statement. The amount so collected $505 is debited to Cash, and credit $5 to
Revenue and balance $500 as its liability payable to American Express. The American
Express on the other hand on payment (or on receipt of advice from the issuing bank)
debits the Bank A and credit Cash. The Income Statement of American Express is not
affected either on issue of Travelers check by A or at the time of encashment of TC. The
revenue of American Express is the interest it earns during the period on non encashment
of TC.

Reply to Query 8: Product Repurchase Agreement:

The instant case is an example of circular trading and finance accommodation. This is
neither permissible by the accounting standards nor by the tax laws.
However under given situation (Presuming that A does not disclose repurchase contract),
then this will amount to sale of A and a could recognize its Revenue and B as its purchase
and also bank loan $100,000. On July 2011 when A repurchase goods from B for
$112,000, then it will be As purchase for $112,000 and Bs sale for $112,000.
However if the repurchase contract is well disclosed, then instead of sale of $110,000 it
should be treated as Inventory of A lying with B and receipt of $100,000 from B as loan
from B. Similarly in Bs books, Bank loan will appear as $100,000 in December and in
July B will adjust interest paid to Bank out of $12000 and balance as its revenue for
accommodating fund from its bank for A.
Reply to Query 9: Franchisees:
In the instant case it is given that the National Real Estate Broking Firm provides
franchisee right to other Broking firms. For this it charges $10,000 as initial fee plus 6%
of the receipts of Franchisee as royalty.
Presuming that initial Franchisee fee is non refundable then the National Broking firm
should reco9gnise $10,000 as its revenue at the time of signing the agreement. The
royally @6% of receipt however shall be treated as revenue as and when it accrues.
After three years as mentioned the business of Real Estate Broking firm may decline.
This will not affect the revenue recognition either in respect of initial Franchisee Fee or
periodical royalty receipt.
Reply to Query 10: Computer Systems:
In the instant case it is given that Tech Logic a computer manufacturing firm based in
USA has received order for supply of computer with advanced software worth $570,000
from a Buyer situated in one of the erstwhile Soviet Union countries. Tech Logic after
manufacture of requisite computer has shipped the product. The present Revenue
recognition policy prevailing at Tech Logic is to recognize the revenue on execution of
contract or when it accrues.
It is also given that Tech Logic is not very sure about enforcement of its supply
agreement in the other country and moreover there is uncertainty about receipt of
payment. Considering uncertainty about enforcement of Tech Logic right arising out of
sales agreement and also about receipt of payment, in my opinion it (Tech Logic) should
not recognize the Revenue until it actually receives the payment or the uncertainty is over
In fact Tech Logic should make adequate provision for uncertainty or probable risk of
default.