LO 9.1Review the new revenue recognition guidance issued by the Financial Accounting Standards Board http://www.fasb.org/jsp/FASB/Page/ImageBridgePage&cid=1176169257359 and answer the following questions.
- What is the new standard as of ASC 606? What does that mean to you?
- What are the recommended steps companies should follow to achieve the core principle?
- How does this change current GAAP standards?
- Who is required to adhere to this new standard?
LO 9.2You run an office supplies chain. You must determine the most appropriate bad debt estimation method to use for financial statement reporting. Your choices are the income statement, balance sheet, and balance sheet aging of receivables methods.
- Research a real competitor in your industry and determine which method the competitor selected. Give a detailed description of the method used and any supporting calculations.
- Create a hypothetical credit sale, an accounts receivable figure for your business, and compute the bad debt estimation using the competitor’s method.
- Create the journal entry to record bad debt.
- Compute bad debt using the other two methods and show the journal entry for each.
- What are the benefits and challenges for all of these methods?
- Which method would you choose for your business? Explain why.
LO 9.3You are considering a $100,000 investment in one of two publicly traded companies in the same industry. Review the last three annual financial statements (same fiscal year) for two publicly traded companies in the same industry. Based on the information obtained, complete the following.
- Compute the accounts receivable turnover ratio (round all answers to two decimal places).
- Compute the number of days’ sales in receivables ratio for both companies for the two most current years (round all answers to two decimal places).
- Describe and interpret the outcomes, stating which company you would invest in and why.
- What information is missing that could help you make a more informed decision?
LO 9.4You are considering two possible companies for investment purposes. The following data is available for each company.
Additional Information: Company A: Bad debt estimation percentage using the income statement method is 6%, and the balance sheet method is 10%. The $230,000 in Other Expenses includes all company expenses except Bad Debt Expense. Company B: Bad debt estimation percentage using the income statement method is 6.5%, and the balance sheet method is 8%. The $140,000 in Other Expenses includes all company expenses except Bad Debt Expense.
- Compute the number of days’ sales in receivables ratio for each company for 2019 and interpret the results (round answers to nearest whole number).
- If Company A changed from the income statement method to the balance sheet method for recognizing bad debt estimation, how would that change net income in 2019? Explain (show calculations).
- If Company B changed from the balance sheet method to the income statement method for recognizing bad debt estimation, how would that change net income in 2019? Explain (show calculations).
- What benefits do each company gain by changing their method of bad debt estimation?
- Which company would you invest in and why? Provide supporting details.
LO 9.5You own a construction company and have recently received a contract with the local school district to refurbish one of its elementary schools. You are given an up-front payment from the school district in the amount of $5 million. The contract terms extend from years 2018 to 2020.
- When would you recognize revenue for this payment?
- What method of accounting would you use for this construction project and why?
- What would be the benefits and challenges with your method selection?
- Give an example of your distribution selection and associated costs of the project (you may estimate based on other industry competitors).
- What might be some benefits and challenges associated with the other method of construction revenue recognition?
LO 9.6When a customer is delinquent on paying a notes receivable, your company has the option to continue to attempt collection or sell the debt to a collection agency. Research the benefits and challenges with each of these options and in a short essay, answer the following questions.
- What are the benefits and challenges of continuing to attempt collection yourself?
- What are the benefits and challenges of selling debt to a collection agency?
- If you had a dishonored notes receivable, which option would you select and why?
- Would you weight certain benefits or challenges differently when making your selection? How?