Rsm221 Iap Case Study

RSM221 IAP Sample Solution – Tutorial January 2011
***Please note that this is a sample solution key – it is advised that the points below be elaborated (more complete sentences) when submitting your IAP. Please also refer to the ‘Case Primer’ in your Intermediate Accounting textbook for more tips/guidance to case approach*** Good luck with your first IAP! 1) OVERVIEW- clear, succinct summary 2) ISSUE ID AND ANALYSIS  Identification: o The main issue is when to recognize the revenue with respect to the new subscriptions, keeping in mind the incentive of management to present the financial statements in the best possible light to facilitate the loan from the bank. o The bank is the user of the financial statements and will likely want statements prepared in accordance with GAAP or IFRS, as they are more reliable and relevant. 
o To recognize revenue, the risk and rewards of ownership must pass or there must be substantial completion of performance. o Related costs must be measurable and collection must be reasonably assured. o No historical company information to rely on in terms of cancellation rate (%). o Harsh economic environment may mean higher cancellation rates than normal for industry. o Leads to the need for a significant amount of professional judgement. o Management bias to accelerate the recognition of subscription revenue in order to improve return on assets ratio. o Management compensation may be tied to ability to grow the company, given the comments made by CEO. o Alternative #1: Recognize revenues as magazines are delivered o Credit to unearned revenue, with amortization to income as monthly edition is distributed. o Risks and rewards passed and revenue earned at point of distribution. o Cancellation rate based on competitor information so appears measurable (although not necessarily reliable). o To the extent that 20% cancellation rate is reasonable, can recognize revenue when distributed and