2. How should the company recognize revenue based upon the two possible FOB structures mentioned in the case? Why? According to U.S GAAP, there are four criteria must be met in order to recognize revenue: i. Persuasive evidence of an arrangement exists;
ii. Delivery has occurred or services have been rendered; iii. The seller’s price to the buyer is fixed or determinable; iv. Collectability is reasonably assured.
Base on the case, Biovail have met criteria i, iii, and iv. For the first criteria, there seem to be a continuing relationship between Biovail and the Distributor and that surely there was a bill, invoice, purchase order in order to support this sale of the Wellbutrin XL. For third criteria, there is a defined price for the distributor and for forth criteria; it shows that the distributor was a major international pharmaceutical company, so collectability also looks like reasonably assured. The key point is related to second criteria which are Delivery has occurred or services have been rendered. Biovail’s Chief financial officer states that the ownership and responsibility had already passed on to the distributor when it left the shipping dock (FOB shipping point). With term FOB shipping point, the Company should recognize revenue at the point in which product leaves Biovail shipping dock at the warehouse. it indicate that the ownership and responsibility over the goods is transferred from Biovail to the client (Distridutor).This means that goods in transit should be reported as a purchase and as inventory by the buyer. The seller should report a sale and an increase in accounts receivable. However, unknown to Crombie, the agreement between Biovail and the Distributor provided that ownership and responsibility, and risk of loss would only have passed to the distributor when the product was delivered to their facility (FOB destination). With term FOB Destination, the Company should recognize revenue at the point when product is delivered...
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