In 2000, TSA stated in its footnote on revenue recognition that: The Company recognizes software license fees
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Question:
The Company recognizes software license fees upon execution of the signed contract, delivery of the software to the customer, determination that the software license fees are fixed or determinable, and determination that the collection of the software license fees is probable. [TSAI 2000, 40; emphasis added]
a. Why is a judgment on probable collection of accounts receivable an important element in determining whether revenue should be recognized? How is this feature addressed in ASU 2014-09 (refer to ASC 606-10-25-1(e))? Distinguish between the role of collectability and credit risk in your answer (refer to BC 42, 43, 260, and 265 in ASU 2014-09) and explain why their accounting differs. In the five-step process for revenue recognition, to which step(s) does this requirement pertain? Explain.
b. For certain contracts for which revenue was recognized in fiscal years 2000 and 2001, it was later determined that collection was not probable at the inception of the contract. TSA later restated its year 2000 and 2001 financial statements to correct for this error. In the corrected financial statements, software license revenue was recognized when cash was received on contracts where collectability was not reasonably assured at inception.
What would be the impact of this correction on (1) revenue and (2) bad debt expense in year 2000 and 2001 financial statements? Explain your answer. Consider only transactions for which the company failed to collect all or some of the license fees it initially recognized as revenues when collectability was not assured. TSA uses a balance sheet approach (percent of receivables) to estimate bad debt expense.
Related Book For
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon
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