Each of the following situations is independent:
a. A company sells books through the Internet. The company obtains the books from the publishers and carries them in inventory for immediate shipment. Customer payment is by credit card.
b. An interior design company operates a showroom. Furniture manufacturers send samples of their products to the showroom for display. When a customer orders furniture, the company transmits the order to the manufacturer, and the manufacturer ships the products directly to the customer. Customers pay a deposit by cash or credit card, with the balance due (cash or credit card) when the product is delivered.
c. CanLight Ltd. is a company that sells electrical lighting fixtures. The fixtures are produced in China and shipped to CanLight by container ship. The producer pays shipping costs and retains title to the fixtures both while in transit and while they are in CanLight’s inventory. CanLight markets and sells the fixtures to builders for inclusion in new construction. When a sale is made, CanLight delivers the fixtures to the building site and invoices the builder. When the builder pays the invoice, CanLight sends 70% of the cash to the producer by international bank transfer.
For each of the preceding situations, explain:
1. Whether the seller should report the gross amount of the sales transactions as revenue; and
2. Your basis for deciding whether to recognize gross or net revenue.