Part I - Finding Topics in the Codification

Access the FASB Accounting Standards Codification through Checkpoint or using the AAA access to the FASB Professional Codification.

Determine the specific nine-digit Codification citation ASC (XXX-XX-XX-XX) for accounting for each of the following items related to Revenue Recognition under Accounting Standards update

Example:

Question: What indicators are used to determine when a contract with a customer exists?

Answer (Citation): ASC 606-10-25-01

Questions

1. What alternative approaches can be used to estimate variable consideration?

ASC 606-

2. What alternative approaches can be used to estimate the stand-alone selling price of performance obligations that are not sold separately?

ASC 606-

3. What determines the timing of revenue recognition with respect to symbolic intellectual property?

ASC 606-

4. What indicators suggest that a seller is a principal rather than an agent?

ASC 606-

Part II: Accounting Research Memo

Background:

Spicer Integrated Circuits (Spicer) is a manufacturer of specialized integrated circuits used in automobile safety equipment. Niko Motors has been a long-time customer of Spicer. In the past, Niko had directly purchased Spicers integrated circuits and incorporated the integrated circuits into safety equipment built at Nikos factories.

Niko informed Spicer that for its new SUV, the N5e, Niko has a contract with an auto parts manufacturer, ACD to build the safety equipment for Niko. Niko will require that ACD use the Spicer Integrated circuit known as DaChp in the safety equipment. Spicer sells DaChp to Niko for $100 each. Payments are made by Niko to Spicer by wire transfer upon the arrival of the chip at Nikos factory.

ACD needs financing for the construction of a new factory that it needs for the Niko Motors business. Spicer also needs cash for capital expenditures to expand its DaChp production capacity. Niko had positive significant positive cash flow for the past decade and is looking for investment returns. As a result, Spicer, Niko, and ACD arranged a financing plan for the first order of 15,000 units of DaChp to be shipped to ACD. The deal was signed on July 1, 2019, by Spicer, Niko, and ACD. Spicer promised that the shipment of the initial 15,000 chips would arrive at ACDs factory on June 30, 2021. Other features of the arrangement are:

• The contract has a term of seven years expiring on June 30, 2026. ACD will order a minimum of 100,000 units of DaChp during the seven-year contract term.

• The price for DaChp will be $100 per unit payable upon arrival at ACDs factory except as modified for the financing arrangement applicable to the first 15,000 units shipped.

• Niko Motors will guarantee payment of ACDs obligations to Spicer under the contract. Any payments made by Niko to Spicer under the agreement on behalf of ACD will give Niko the right to be reimbursed by ACD either directly or by right of offset.

• On the date the contract is signed, July 1, 2019, Niko Motors will make a payment to Spicer for $453,515 as prepayment in full for the first 5,000 chips to be shipped to ACD on June 30, 2021.

• On the date the contract is signed, July 1, 2019, ACD will execute a Note Payable to Niko requiring ACD to make three annual payments of $174,861 starting July 1, 2021. The Note will reimburse Niko for the $453,515 advance payment Niko made to Spicer plus interest at five percent (5%) per annum. The consideration ACD received for signing the note is Spicers promise to ship 5,000 units of DaChp to arrive at ACDs factory on June 30, 2021.

• ACD will execute a Note Payable to Spicer on June 30, 2021. Niko Motors will guarantee the Note Payable. The Note will require two annual payment from ACD to Spicer of $537,805 due on June 30, 2022, and June 30, 2023. The Note is designed to reimburse Spicer for the $1,000,000 cash price for the 10,000 chips (10,000*$100) received by ACD plus interest at five percent (5%) per annum. The consideration ACD received for signing the Note is the 10,000 chips shipped to them on June 30, 2021.

Assignment:

You work in Spicers accounting department. Your boss is Spicers Controller, Ms. McGee. She is concerned about the GAAP treatment of this transaction.

Ms. McGee wants you to provide her with

1. A properly structured accounting research memo that explains and justifies the accounting treatment of this transaction under GAAP. In that memorandum, use proper citations to the FASBs Accounting Standards Codification and other authoritative sources.

2. A schedule of the expected impact the transaction will have on Spicer's Income Statement (Revenue and Expense) and Balance Sheet (Assets, Liabilities, and Equity) for the years ended:

• December 31, 2019
• December 31, 2020
• December 31, 2021
• December 31, 2022
• December 31, 2023

Ms. McGee is fond of using the Basic Accounting Equation: Assets = Liabilities + Equity, to check the balance sheet implications of transactions. In applying the Accounting Equation, do not forget the Cash and Retained Earnings balances implicit in the accounting for the contract between Niko, Spicer, and ACD.

Hints:

1. This situation represents a measurement Issue as described in ASC 606-10-32-1 through ASC 606-10-32-45. The specific issue is addressed under "The Existence of a Significant Financing Component in the Contract: See ASC 606-10-32-15 through ASC 606-10-32-20.

2. Examples and guidance for The Existence of a Significant Financing Component in the Contract appear in ASC 606-55-226 through ASC 606-10-55-246. Pay special attention to Example 29, especially the journal entries found in ASC 606-10-55-243.

3. For any interest rate computations, you should use five percent (5%). That is the interest rate Implicit in the transaction, the contractual discount rate, the rate in a separate financing transaction, and the incremental borrowing rate for both Spicer and ACD.

4. Answering this question requires an understanding of the time value of money concepts.