Darwin Technologies (DT) is a marketing company that offers a variety of services to its customers. For example: DT will create a TV commercial for $1,000,000, build an app for $500,000, and build a Facebook page for $250,000. These amounts represent DT’s prices for each when DT sells them separately to customers. The TV commercial, the app, and the Facebook page are not interrelated; that is, a customer can purchase and use each of the offerings independently of the others. If a customer purchases all three items together, the total price is $1,500,000. Payment terms are 50 percent due at contract signing, with the remaining 50 percent due over the rest of the development period (25 percent at mid-point, 25 percent at completion). After delivery, if a customer’s new app is downloaded 500,000 times or more in the first month, the customer must make a one-time bonus payment of $250,000 to DT. Stone, a customer, approaches DT with the hopes of appealing to a younger customer base. Stone has a verbal agreement with DT that is based on DT’s unsigned quote to Stone made on November 30, 2021, for one TV commercial, one app, and a Facebook page for a price of $1,500,000. The agreement creates enforceable rights and obligations pursuant to DT’s customary business practices. DT performed a credit check on Stone and has determined that Stone has the intention and ability to pay DT for fulfilling its portion of the contract. If Stone cancels the contract for reasons other than DT’s failure to perform under the contract as promised, Stone is required to pay DT for its work completed to date. As per the agreement, Stone makes a payment of $750,000 on November 30, 2021. From the date of the quote, it takes DT six months to develop and produce the TV commercial, two weeks to complete the Facebook page, and three months to complete a fully functioning app. After delivery of the app to Stone, DT does not think that the app will be downloaded 500,000 times in the first month of service because Stone’s customer base does not quickly accept newly developed technology. On the basis of its experience with similar technology, DT expects that it will take about two or three months for Stone’s users to begin to download its app on a regular basis. Requirements DT’s CFO is unfamiliar with the revenue recognition model under ASC 606 and has asked you to explain how the company would account for this set of facts. She is aware of the 5-step model but is unclear how it should be applied. In other words, she wants you to walk her through each of the 5 steps using the information provided. Part 1: The CFO asked you to first prepare a short table that lists each of the 5 steps. She then took the table and wrote down the issues for each step that she wants you to examine and explain. The table is below. For each step, respond to her questions in a separate Word file and present it in a manner that is understandable to her. (This need not be a memo, but it should be in good form. I will grade it as if I am the CFO). Part 2: After completing Part 1, indicate how your conclusions might change if: DT believes at the outset that there is about a 75 percent chance that the app will be downloaded more than 500,000 times during the first month and it is probable that there will not be a significant reversal of revenue, and The app sold to Stone is actually downloaded more than 500,000 times in the first month? ————————————————– TABLE Step. Description Issues to be Examined 1. “Identify the contract(s) with a customer.” What conditions must exist in order for an agreement to meet the definition of a “Contract.” Briefly explain each of the conditions and apply them to the above set of facts. Based upon this analysis, does a contract exist or not for purposes of ASC 606? Explain. 2. “Identify the performance obligations in the contract.” What is a performance obligation? In this set of facts, how many performance obligations exist for purposes of ASC 606? Explain the factors that you considered in arriving at your conclusion. 3. “Determine the transaction price.” What does the term “transaction price” mean? Based on the information provided, what is the total transaction price that should be used during the first month? Is it fixed, variable or both? How did you arrive at this amount? 4. “Allocate the transaction price to the performance obligations in the contract.” Using the set of facts, allocate the transaction price to the performance obligations identified in Step 2. Explain your reasoning and show your calculations. 5. “Recognize revenue when (or as) the entity satisfies a performance obligation.” When is revenue recognized in this example? Explain the difference between recognition of revenue “at a point in time” or “over time.” How would it apply to this transaction?
Do you need help with this assignment or any other? We got you! Place your order and leave the rest to our experts.