Revenue recognition memberships 3. Revenue recognition guests 4. Special promotions 5. Coupons 6. Dealer Loan 7. Lawsuit 8. Lease 9. Gasoline storage tanks Analysis and Recommendations 1. Usually you would want to go back three years first so that if you incur another loss next year you can still go back to the other two years if there is taxable income remaining. This will result in an income tax receivable which will increase current assets and have a positive impact on your current ratio.
Revenue recognition memberships The contract with the customer is for the membership in the club. This would be a written agreement between the member and SI. There is one performance obligation, the promised service is membership in the ski club.
There is no transfer of the service until the membership is provided. The performance obligation for the initiation fee is satisfied over the period of time that the member belongs to the club. There should be enough historical data available to come up with a reasonable estimate.
There would be no cash collection risk since the amount is paid upfront. The annual fee is a written agreement between the member and SI. There is again one performance obligation the service for this year.
This would be unearned revenue when received. Revenue recognition guests The contract with the guest is the written contract when they receive the ticket to ski not when the reservation is made since this reservation could be cancelled. The performance obligation is the right to ski that day. The overall contract price is the price of the ski ticket.
The performance would be the right to ski on that day. There is no cash collection risk since the guest pays by credit card when they purchase the ticket. Special promotions The contract with the customer is the written contract when they receive the ticket and the right to a future lesson. This price would need to be allocated to the two separate performance obligations based on their relative fair value.
There would be no cash collection risk assuming a credit card is used to purchase the special pass. Coupons It must be determined if an economic loss would occur for the coupons. This is a minor amount compared to the price of the ski pass so SI would still be selling the ski pass at a profit. Therefore, the coupons should only be recognized as a cost when they are redeemed.
This is often referred to as a dealer loan. Most liabilities are measured in other liabilities and since there is no mismatch I recommend this loan be recorded in other liabilities. This would not impact the current ratio in 20X5 because the full amount would be presented as long term.
Lawsuit It must be determined if the lawsuit is probable and if the amount can be measured. The Board has decided to settle the lawsuit therefore it is probable there will be a payment. The amount will be based on managements best estimate. This liability would be current if the payment is made next year which would have a negative impact on the current ratio.
Lease The lease would be an onerous contract since the costs exceed the benefits since the leased property will not be used by SI. The current portion of the provision would have a negative impact on the current ratio.
Gasoline storage tanks The gasoline storage tanks would be set up as an item of property, plant and equipment and depreciated over the 15 years. The costs to remove the tanks would be a legal obligation and would need to be set up as a decommissioning provision. This amount would be debited to the gasoline storage tanks and credited to the provision. The asset would be a long term asset and the decommissioning provisions would be a long term liability so this would not impact the current ratio.
The company complies with IFRS, and is contemplating a public offering in the medium term. GAAP compliance is therefore important. Because of possible analyst interest, sales measurement is of critical importance.
Ethical reporting choices are critical, given the possibility for increased scrutiny in the future; sudden changes in accounting policy at a later date may not be viewed with favor by analysts. Reporting objectives are meant to support a public offering. Loyalty points program 2.
Decommissioning obligations 3. Cash refund program 4. Coupon program Analysis and recommendations 1. Loyalty points program PDL operates a loyalty points program, which will impact on the measurement of sales revenue, important for analysts.
Currently, a sale transaction with point value attached is recognized as a sale entirely in the current period. An expense and liability for the cost — not sales value — of goods to be redeemed in the future is recognized in the same time period as the sale. This policy maximizes the sales value recorded with the initial transaction.
It does not reflect the substance of the transaction, though, which is that PDL has rendered multiple deliverables in sale: both the initial sale, and the subsequent sale based on points value are being sold. The sale in the store is a contract with the customer but there are two separate performance obligations. There is the sale of the goods now and the future redemption of points. This loyalty program provides the customer with a material right.
On a sale that involves issuance of points, the consideration received must be allocated between the sale of the product and the points on a relative stand alone basis. The value of points to be redeemed in the future is recorded as unearned revenue. When points are redeemed, the sales value of the redemption transaction is recorded as sales revenue and cost of goods sold reflects the merchandise purchased.
This approach defers sales revenue and gross profit to later periods. As a result, current earnings and sales are lower, but future periods show higher sales and earnings.
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