Revenue Recognition and Wareham SC Systems, Inc.
Wareham SC Systems, Inc. is a capital equipment and testing instrument manufacturer and supplier comprised of three divisions: the Glendale Division, the Advanced Technology Division and the Technical Devices Division (Anthony, Hawkins, & Merchant, 2011, p. 137). In 1999, Somai Desai, the company’s chief financial officer, received news that the Security Exchange Commision (SEC) issued a new set of revenue recognition and reporting guidelines which were to be implemented no later than the fourth quarter of 2000. These new guidelines called the Staff Accounting Bulletin No. 101 (SAB 101), provided more specific criteria for revenue recognition and are listed as follows: Persuasive evidence of an order arrangement exists;
Delivery of the ordered goods has occurred or services have been rendered; The seller’s price to the buyer is fixed or determinable; and, Collectibility of the sale proceeds is reasonably assured (Anthony et al., 2010, p. 138). Adoption of the SAB 101 standards meant that Desai would have to review the provisions contained in each of the three division’s sales contracts to determine what administrative changes need to be made to the company’s revenue recognition policy.
GLENDALE DIVISION: ONSETCOM, INC. AND CATAUMET DEVICES, INC.
The Glendale Division manufactures equipment that is generally sold in a standard model. Under their sales contract, customer acceptance is recognized after the customer received and tested the equipment which would then follow a formal sign-off or the passage of 90 days without a claim. However, if a claim arose, the customer could either request a full refund, a replacement unit or require the division to repair the equipment according to the customers requirements. Payment is due 30 days after customer acceptance and title is passed to customers upon delivery. The problem with this contract is that the company’s current...
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