Chapter 18 Accounting in Action: CM2 complete solutions correct answers key

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This morning before going to work, you read in the paper about a company that

the SEC is investigating for improper revenue recognition. It is not clear from the

article what industry this company is in, but you start to wonder about the specific

recognition policies at CM2. You know that CM2 sells a product and a service,

and you are aware that its service contracts extend over variable lengths of time,

but you are unsure whether it includes upgrades in the sale price of its products.

When you arrive, you find Conner and Martin and ask how CM2

recognizes revenue. They indicate that there is only one way to record revenue

for a product and that is when the company ships the product. For an individual

service call, CM2 recognizes revenue when the service technician leaves the

company premises to provide the service to the customer. They are not quite

sure how the revenue from service contracts is recognized.

Instructions

(a)

Prepare a brief memo describing the various revenue recognition

methods acceptable for CM2. Recall that it sells products (with possible

upgrades included in the sale price), provides service on demand for

customers, and has service contracts that guarantee customers service

over a specified period of time. Also recall the “product” contains both

software and hardware and that each may be sold separately or as a

package. Access the FASB Accounting Standards Codification to provide

Continuing Case

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authoritative support for the position articulated in your memo for each of

these categories.

(b)

Access the 2012 10-K for Microsoft, Inc. within the SEC website

(www.sec.gov). Examine Microsoft’s Significant Accounting Policies

(usually found in footnote 1). Write a memo to Conner and Martin

describing Microsoft’s revenue recognition policies, so that they will have a

better understanding of the issues faced by a firm in the software industry.