For this assignment, assume you are a staff auditor at a public accounting firm.

You’ve been assigned to work on the audit of a new client (CupCo) who manufactures paper and plastic cups and plates for fast food restaurants and concessions at large entertainment venues and sports arenas. CupCo’s largest customer is Louisiana Tech University Athletics, who just negotiated a new contract for all soft drink cups to be sold at sporting events for the 2020 calendar year. Selected information about the terms of the contract are provided below:

• The contract was signed on April 1^st, 2019.
• The contract stipulates that LTU Athletics will pay CupCo $6,000,000 when the cups are delivered FOB destination to the Athletics department in Ruston. At this point, both ownership and control will transfer to LTU Athletics.
• At contract initiation, CupCo estimates that the total costs to complete the order will be $4,000,000.
• The contract stipulates that all cups will be a custom 18.94oz size and that half of the cups will be printed with Bulldog designs and the other half with Lady Techster designs. The printing of the cup graphics is completed at the end of the production process where a rubberized wrap is printed to the customer’s design specifications and adhered to the cup. The design graphics are the last step in the production process and can be modified or changed at any point prior to printing. The custom 18.94oz custom size, however, requires a new set-up of production equipment and will be done just to complete the LTU Athletics order. Then, the production equipment will be reconfigured for the usual capacities manufactured (16oz, 24oz, and 36oz). CupCo would not be able to sell the custom cups to another customer and once manufactured the plastic cannot be remolded into another size.
• Accordingly, the contract stipulates that if LTU cancels the order, CupCo is entitled to reimbursement of the total manufacturing costs actually incurred to date in the production process plus a 33% profit margin.
• Total manufacturing costs incurred in the production process were $250,000 to date as of 6/30/2019.
• Total manufacturing costs incurred in the production process were $1,250,000 to date as of 9/30/19.
• The cups were completed in late December 2019 with a total cost of $4,000,000. The cups were delivered to LTU Athletics in early January 2020, at which time LTU accepted delivery and issued payment of $6,000,000 to CupCo.

Required:

The contract represents a material revenue stream for CupCo and the partner in charge of the CupCo engagement has asked your team to research the appropriate timing of revenue recognition for this contract under the FASB’s recently revised revenue recognition standard. ASC 606-10-25-27 outlines the requirements for the timing of revenue recognition.

1. When should CupCo recognize revenue for the contract with LTU Athletics?
2. What are the criteria for recognizing revenue over time versus a point in time in ASC 606?
3. If CupCo uses an input based method of revenue recognition known as cost-to-cost (the percentage of completion method), how much revenue should CupCo recognize at the following quarter-end dates?
   1. 6/30/2019:
   2. 9/30/2019:
   3. 12/31/2019:
   4. 3/31/2020:
4. What is a possible Risk of Material Misstatement (RMM) applicable to over time versus point in time revenue recognition?
5. What internal controls should be in place at CupCo to ensure the appropriate timing of revenue recognition (specifically, what activities should the controller of CupCo be performing)?
6. What auditing procedures would you perform?

Answer rating: 100% (QA)

ANSWER 1 CupCo should recognize revenue for the contract with LTU Athletics over time in accordance with the requirements of ASC 606102527 2 The crite... View the full answer