801 Case Study

Case for ACCT 801:
Lighthouse is a provider of locating services to the shipping industry. Lighthouse’s Ship Finder service is a one-way messaging service that routes messages from the ships at sea to the shipping company’s offices. These messages provide the shipping company with detailed information related to ship location, speed, and current local weather. In order to utilize the Ship finder service, Lighthouse must install a dedicated hardware unit or device on the ship. Customers generally sign two separate contracts, one governing the sale of the devices and the other governing the provision of the service. Once the devices are installed (one per ship), Lighthouse will connect the device to its service. Service contracts generally are for 12 months and are billed on a monthly basis. The services are priced at standard rates, although discounts are offered depending on the number of devices sold. The devices also have been sold at a discount. However, the discount is based on the number of units purchased (or to be purchased) and does not appear to be unreasonable. Standard pricing for the devices and service are as follows: Ship Finder Device: $10,000 per unit, MSRP Ship finder Service: $300 per month, per unit The Lighthouse devices are made to be used exclusively with the Lighthouse services and, currently, there are no other competitors making devices that work with the Lighthouse services. Customers may cancel the service at any time. However, amounts paid related to the devices are non-refundable. Payments for the devices are due upon completion of the installation and final acceptance by the customer. REQUIRED:

1. Assume you are a staff accountant and have been asked by your supervisor to analyze the above situation for one of your clients, specifically to determine how revenue should be recognized for both the Ship Finder devices and the Ship Finder service. 2. Write a memo to your supervisor explaining your...
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