SinghMonikaAssignment1
.docx
School
Yorkville University**We aren't endorsed by this school
Course
BUSI 44
Subject
Accounting
Date
Jan 13, 2025
Pages
5
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Issue 1: Revenue Recognition – Upfront FeesIssueOdisha charges an upfront fee of $1,200 from their clients, which is deferred and recognized equally over a 12-month period. There is an issue in ensuring the revenue recognition principle complies with ASPE SECTION 3400. Issue whether the upfront fee amount is payment for services performed over time or if a portion of it should be recognized immediately.AnalysisUnder ASPE, revenue should be recorded when:1.There is strong proof of an agreement.: Agreement between the seller and the buyer about the nature and terms of the sale and services are performed and delivery of goods has occurred.2.The price that sellers charge buyers is either fixed or determinable.: The fee amount is fixed and determinable and the assurance of the collection is reasonable.Odisha has a business offering services like advice for matchmaking to couples, making profiles of couples and video creation, and continuing matchmaking assistance over 12 months. Therefore, the deferral policy aligns with the matching principle. The amount of money that Odisha would ultimately keep is called into question by the refund clause. Any liability for refunds should be recorded at the time revenue is recognized.CalculationTotal Revenue. $480,000 (400 *12)Revenue per month per customer. $100 (1,200/12)Revenue deferred as of Sept 30, 20X1 ($480,000)Estimated 25% refund provision (($480,000 *25%= $120,000).Recommendations:1.It is recommended to modify revenue recognition to more closely match the service's delivery schedule. More revenue from the initial consultation should be recognized (for instance, 30 to 40%), and the remaining revenue should be recognized over a 12-month period.Also Set up the refund liability using the historical data approach.2.Disclose the revenue recognition and refund liabilities in the financial statements of the company.Issue 2: Revenue Recognition and Expense Treatment for Socialize in Charlottetown SeriesIssue
Odisha recognizes revenue and expenses from events such as dinner parties and wine tastings when money is received, and events take place. Under ASPE, Odisha must ensure proper revenue recognition and expense matching to reflect the economic substance of transactions. Issue is:principle vs. Agent Relationship: How revenue and expenses are reported depends on whether Odisha is acting as a principal or an agent.Venue Coupons and Complaints: While Odisha is not directly in charge of complaints, the venue's actions may have an effect on Odisha's reputation with clients.Analysis1.principle vs. Agent RelationshipOdisha as Principal: Odisha must record gross income ($125 per client) and associated expenses ($100 per client) if it controls the event services before transfer to the client.Odisha as Agent: if Odisha does not control the event services, then it should only recognize the net amount ($25 per client).There are some possible indicators of Odisha being the principal, like Odisha selecting and securing venues, collecting payments directly from clients, and setting the markup price.2.Venue Coupons and ComplaintsOdisha's revenue and expenses are not immediately impacted by venue-issued coupons.However, if Odisha chooses to handle complaints in the future, it might be necessary to evaluate customer satisfaction and potential refund obligations.CalculationRevenue and Expenses for the Wine TastingGross Revenue: $125 per customerEvent Expense: $100 per customer Markup: $25 (125-100)Given reported amounts:Revenue: $23,000Expenses: $18,400Gross Profit: $4,600 (23000-18400)Recommendations:1.Revenue Recognition: If Odisha is the Principal, then follow the gross revenue ($125) and expense ($100) approach. If Odisha is the Agent, then adjust the financial statements to show net revenue of $4,600.2.Customer Complaints: For this matter it is recommended to document complaint-handling procedures for the reputation risk process.3.Disclosures: Disclose the revenue recognition policy and principal-agent relationship in the financial statements.Issue 3: Leased Truck Accounting:
IssueOdisha has leased a truck and is showing the expense of monthly lease payments in the financial statements. Under ASPE Section 3065, Leases are classified as either capital leasesoroperating leasesbased on certain requirements. The issue is whether the truck is recorded as an asset or records monthly rental expenses.Requirements (ASPE 3065)A lease is classified as a capital lease if any of the following requirements is met:1.Ownership of the asset is transferred to the lessee at the end of the lease term.2.The lease contains a Bargain Purchase Option.3.The Present value of the minimum lease payments is equal or more than 90% of the fair value of the asset.4.The lease term is equal to or more than 75% of the economic life of the asset.AnalysisThere is no Bargain Purchase Option as the price shows Fair Value.The lease term is 40% of the economic life, which is less than 75% of the requirement for the capital lease. The lease term is 4 years, and the economic life is 10 years.Total monthly lease payments are $37,968 ($792 * 48 months). The present value of the monthly lease payments is $37,968, which is only 58% of the fair value (65,000) and does not meet the 90% requirement.Ownership does not transfer during the lease, but Randeep may purchase the truck at the end of the lease for $40,000, which is the expected fair value.Hence, the lease does not meet any of the capital lease requirements, so it is considered as an operating lease under ASPE.CalculationTotal Lease expenses for 4 years: $37,968 ($792 * 48 months).Annual Lease expense $9,504 ($792*12)The monthly Lease expense is $792.Recommendations:Continue recording monthly lease payments as the lease does not comply with any of the capital lease requirements.
Disclose the lease term, total lease payments, and purchase option in the financial statements of the company.Issue 4: Accounting for Investment in Dinner for Eight Ltd. (DFEL)Odisha has recorded its $1,500 investment in DFEL as an "other asset." Under ASPE Section 3051 (Investments), the accounting treatment for investments depends on the level of influence or control over the investee. With a 15% stake in DFEL, Odisha also has active participation in decision-making and board membership. The issue is to determine whether investments recorded as other assets are appropriate.Requirements for Significant Influence (ASPE 3051)An investor is considered to have significant influence over an investee:-when an investor Participates in policy-making decisions, material intercompany transactions, and representation on the boards of directors. -when one investor possesses more than 20% but less than 50% of the voting shares; nevertheless, it is still possible for considerable influence to occur even in cases where 20% is not held (it is up to the individual).Analysis-Odisha holds a board seat at DFEL, and also Randeep plans to increase involvement in decision-making these factors help in knowing about the significant influence and require to use the equity method.-Odisha should initially record the investment at cost ($1,500).-By equity method, Odisha will show the share of the net profit of DEFL ($25,000 *15% = $3,750).-NO dividends are paid so no reduction in investments.Investments amount at year-end $5,250 (1,500 + 3,750)Recommendations:Continue using the equity method of accounting in future periods unless investments are sold and significant influence is withdrawn.Reclassify the $1,500 investment from "other asset" to "investment in associate"Disclosures about the nature of investments and ownership percentage and share of income recognized shall be made in the financial statements of the company.