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CHAPTER 5

REVENUE AND MONETARY ASSETS

Changes from Eleventh Edition

The chapter has been updated.

Approach

The sequence of transactions for accounts receivable and bad debts often causes difficulty; indeed, thetime that one is sometimes forced to spend on this topic is all out of proportion to its importance. Studentsoften do not understand why an Allowance for Bad Debts account is necessary at all; they do not graspthe notion that although we feel reasonably sure that some accounts will go bad, we do not now whichones they will be. !ven when they do understand this, the chain of transactions involved in estimating baddebts, writing off specific accounts, and booing bad debts recovered, is complicated and not easy tofollow.

"f e#perience is any guide, it is quite liely that at the time this chapter is taught the press will bedescribing a company that has gotten into trouble for overstating its revenue or understating its bad debtor warranty allowance. Discussion of such a situation would be interesting.

Cases

Stern Corporation (A) is a straightforward problem in handling accounts receivable and bad debts.

Grennell Farm, by contrast, has few technical calculations but provides an e#cellent opportunity for arealistic discussion of alternative ways of measuring revenue and of valuing assets.

Joan Holtz (A) is a different type of case. "t is a device for raising several discrete, separable problems

about the sub$ect matter of the chapter, from which the instructor can pic and choose those he or shewishes to tae up in class. %"t probably is not feasible to discuss all of them.&

Bausch & Lomb, Inc., is an actual case situation involving revenue recognition.

Boston Automation Sstems, Inc! involves a review of the company's revenue recognition practices in thelight of the S!('s SAB )*) %a longer version of the case was included in the !leventh !dition&.

Problems

Problem 5-1

Sale Method Jan. Feb. Mar. April Ma J!ne

Sales.....................................................................................................................................................................+),*** + -,*** +),*** +)),*** +/,*** +),0**(ost of goods sold...............................................................................................................................................1,-** 0,** -,20* 1,)0* 0,-0* -,1103ross margin........................................................................................................................................................+ 2,** +,-** + 2,00* + ,-0* +,)0* + 2,10

"nstallment Method Jan. Feb. Mar. April Ma J!ne

Sales.....................................................................................................................................................................+)),*** +)*,*** +)),0** +)*,0** +)*,0** +/,0**(ost of goods sold...............................................................................................................................................1,)0* 4,0** 1,210 4,-0 4,-0 4,)10

+ ,-0* + ,0** + 2,*0 + ,410 + ,410 +,0

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Accountin"# $e%t an Cases 'e Instructor*s +anual AnthonHa-.ins+erchant

Problem 5-#

Completed Contract Percentage of Completion

$his %ear &e't %ear $his %ear &e't %ear

"ncome e#cluding motel %***&..........................................................................................................................................+),0* +),0* +),0* +),0*"ncome from motel pro$ect................................................................................................................................................* 10* 20* **

"ncome before ta#es..........................................................................................................................................................+),0* +,*** +),1** +),00*Problem 5-(

To record the write5off6

"f Alcom uses the direct write5off method7

dr. Bad debt !#pense.................................................................. +,***

cr. Accounts 8eceivable......................................................... +,***

"f Alcom uses the allowance method6

dr. Allowance for Doubtful Accounts......................................... +,***

cr. Accounts 8eceivable................................................ +,***

To record the partial payment6

"f Alcom uses the direct write5off method6

(ash........................................................................................... +/0*

Bad Debts 8ecovered............................................................ +/0*%or Bad Debt !#pense............................................................ +/0*&

"f Alcom uses the allowance method6!ither of the above two entries or6(ash........................................................................................... +/0*

Allowance for doubtful accounts........................................... +/0*

Problem 5-)

The Allowance for Doubtful Accounts should have a balance of +0),10* on December ). The supportingcalculations are shown below6

*as Acco!nt

+!tstanding Amo!nt

E'pected Percentage

,ncollectibleEstimated

,ncollectible

*5)0 days +20*,*** .*) + 2,0**)45* days )0*,*** .*4 /,***)520 days 10,*** .* )0,***2454* days 20,*** .0 )0,10*4)510 )0,*** .0* 1,0**Balance for Allowance for Doubtful Accounts +0),10*

The accounts that have been outstanding over 10 days %+)0,***& and have 9ero probability of collectionwould be written off immediately and not be considered when determining the proper amount of theAllowance for Doubtful Accounts.

:%)5robability of collection.&


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et Accounts 8eceivable........................................ ............ +4-,0*

c. The year5end bad debt ad$ustment would decrease the year's before5ta# income by +/,0*, asshown below6

!stimated amount required in the Allowance for DoubtfulAccounts....................................................................................

+0),10*

Balance in the account after write5off of bad accounts but beforead$ustment.................................................................................. ,0**

8equired charge to e#pense.............................................................. +/,0*

Problem 5-5

3reen =awn's boos6

dr. "nventory on (onsignment........................................................... -,2**

cr. ?inished 3oods "nventory....................................................... -,2**

>ote that at this point the +),4** wholesale price %3reen =awn's revenue when these goods are sold& isirrelevant.

(arson's boos6 >o entry; the goods are not owned by (arson and hence are not inventory on (arson'sboos; similarly, (arson does not as yet owe 3reen =awn for these goods.

3reen =awn's boos6

dr. Accounts 8eceivable................................................................... 0,*2*(ost of 3oods Sold...................................................................... ,4*

cr. Sales......................................................................... ... ... ... . 0,*2*"nventory on (onsignment.................................................. ,4*

%This can be shown as two entries.&

(arson's boos6

dr. (ash or Accounts 8eceivable....................................................... 4,1*(ost of 3oods Sold...................................................................... 0,*2*

cr. Sales............................................................ ... .... ... ... ... ... ... . 4,1*Accounts ayable................................................................. 0,*2*

%This also can be shown as two entries.&

Problem 5-

#/ ' ) #/ ' 5 #/ '

8evenue..................... +/-*,*** +),21*,*** +,*0,***(osts.......................... 1),*** ),)/*,*** ),1)0,***"ncome....................... +0/,*** + -*,*** + 2/*,***8evenue equals percentage completed during the year times fi#ed price.


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Problem 5-0

The 38@ (ompany's current assets and current liabilities at year5end are shown below.

(urrent assets6

(ash......................................................................................... + ,)**

Accounts receivable................................................................. + 2,40*

=ess6 Allowance for bad debts.................................................. ),-0*>et accounts receivable............................................................ ,-**

Beginning inventory................................................................. 24,**

urchases.................................................................................. )-2,-**Available inventory.................................................................. ),***

=ess6 (ost of goods sold........................................................... )4),1**!nding inventory...................................................................... 4/,**

Total current assets.............................................................. +)0,**

(urrent liabilities6

Accounts payable..................................................................... +-,4**

(urrent portion of bonds payable............................................. 1,1**

"nterest payable......................................................................... 0,***Total current liabilities......................................................... + 1),**

(urrent ratio +)0,** +1),** ).14Cuic ratio %+,)** +,-**& +1),** .1-

The above ratios measure 38@'s ability to meet short5term obligations. The current ratio indicates that38@ has 14 percent more cash and relatively liquid assets that are e#pected to be converted to cash in theshort run than it has short5run obligations requiring cash for their satisfaction. This ratio does notnecessarily mean the amount of current assets is adequate, however. ?or e#ample, the accounts payableand interest payable could be obligations due within the ne#t few days, and it may not be possible toliquidate accounts receivable and inventories that quicly.

b. (ash !#penses6(ost of goods sold.................................................................... +)4),1**

Ether e#penses......................................................................... 4/,**Total cash e#penses............................................................................... +),***

Days' cash +,)** %+),*** 40& 4.0 days.

This ratio measures how many days of normal operating e#penses can be paid without adding to the cashbalance. The above ratio indicates that 38@ (ompany has an apparent stocpile of cash. This means38@ is either planning unusual e#penditures during the ne#t period, or is not properly managing cash.(ash does not generate a return. There is a trade5off between FinstantG liquidity and the return onmaretable securities.

Some students may argue that purchases, rather than cost of goods sold, should be used in the calculation.This would not reflect a true Fsteady stateG of operations, since it happened that 38@ built up itsinventory by +,)** during the year. The argument for basing the ratio on purchases would be stronger ifthe student e#plicitly assumes a long5term buildup of inventory each year %to support increasing sales&;but then, for consistency, some other cash e#penses should probably be increased, too, thus resulting inappro#imately the same 4.05day figure. "n any event, there is no implication that such ratio calculations

2


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The bad debt e#pense is *. percent : +),2,21- +1,12. The entry, therefore, would be6

Bad Debt !#pense.............................................................. /,--4

Allowance for Doubtful Accounts......................... /,--4

The Allowance for Doubtful Accounts remaining on the boos at the end of **4 iscalculated as follows6Allowance for Doubtful Accounts, December ), **0.......... +/,42-=ess Accounts 8eceivable written off in **4........................ 4,-02

,1/2

Add increase to Allowance for Doubtful Accounts forpreviously written5off accounts which were collected duringthe year or deemed collectible in the future.............................

2,0/2

Balance in account........................................... ... ... .... ... ... ... ... . 1,--Add additional bad debt e#pense needed................................. /,--4

Total allowance for Doubtful Accounts, December ), **4. . +1,12

The Allowance for Doubtful Accounts remaining on the boos at the end of **4 is calculated as follows6Hnder %b& or %c&, in the calculation of Accounts 8eceivable6 the last step in the calculation above iseliminated, thus leaving an Accountings 8eceivable balance of +),2),00-.

The Bad Debt !#pense is calculated and recorded the same as shown above.The Allowance for Doubtful Accounts remaining on the boos as the end of **4 is calculated as follows6

Allowance for Doubtful Accounts, December ), **0......... +/,42-=ess Accounts 8eceivable written off in **4........................ 4,-02Balance i n account................................................................. +,1/2Add additional bad debt e#pense............................................ 2,20

Total Allowance for Doubtful Accounts, December ), **4 +1,21

3uestion

4sin" (a) 4sin" (b) or (c)

Accounts 8eceivable, December ), **0.............................. + /--,01Add increase to A8 from sales on account during **4........ /,/40,010

)*,/0,-

=ess decrease to A8 for accounts for which payment wasreceived during **4............................................................... /,4-0,2*

),4-,2)=ess accounts written off in **4............................................ 4,-02+ ),2),00-

Add that portion still due on previously written5off accountwhich was paid in part in **4 with reasonable assurance offuture payment of the payment of the remainder.....................

/*

+),2,21-

4


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quoted prices obtains. Also, many professional service firms %e.g., accounting firms& recogni9e revenue aswor is performed by recording $obs in progress at billing rates rather than at cost. The name Hnbilled8eceivables is often used for this account to emphasi9e that the revenue has already been recogni9ed,even though it has not yet been billed.

!#hibit A

(ollect the cashfrom the customer

(ustomer acnowledgesreceipt of the item

(ollection Iethod urchase raw material

Ship the product to thecustomer and send a

sales invoiceFHsualG Iethod

%Delivery Iethod&

(onvert the raw materialto a finished product

8eceive an order for the productfrom a customer roduction Iethod

"nspect the product

Store the product ina warehouse

To generali9e the discussion, " put on the board a Fcash cycleG diagram lie the one in !#hibit A to thisnote. Starting with purchases, " go around this wheel and add to its interior the three points at whichrevenue can be recogni9ed6 these correspond to the three methods in the case, including the FusualGmethod of recogni9ing revenue when goods are shipped. @hen is the FcorrectG point to recogni9erevenueJ This diagram points out that the answer is not clear5cut. F(onservatismG would say do notrecogni9e the revenue until there is very little uncertainty as to receipt of the cash proceeds, driving therevenue recognition toward the collection point. FTimelinessG would argue for recogni9ing the revenuewhen the Fcritical eventG or FperformanceG has taen place, in this instance as soon as a certainly salableproduct has been produced, i.e., the production method for 3rennell. The measurability of incomecriterion does not help select a method in this instance, as the Cuestion " calculations are feasible for allthree methods.

3uestion

The original cost of the land was only +)-1.0* an acre6 it is now appraised %for estate ta# purposes& at+),*0* per acre, or +.) million. The cost concept says that, at least prior to the transfer of ownership to3rey %and possibly even afterwards&, the balance sheet will show the land at its cost, +10,***. Kowever,again 3AA need not prevail here, for 3rey is trying to assess the economic attractiveness of the farm.Since she could sell the land for +.) million %or more, if the estate ta# valuation was below maret& andinvest the proceeds elsewhere, she will liely want to use the higher valuation in her assessment. %Again,this is an argument often given for stating assets at current values6 the asset is, in effect, tying up +.)million, not +10,***.& "f 3rey wants to thin of selling only the )** acres for the development, then shemay thin of the land value as +. million %),/** : +),*0* plus +0,***&. The point is that the+10,*** historical cost is the least relevant for 3rey's purposes.

3uestion 5

Assuming 3rey agrees that the combination of the production method of revenue recognition and the+. million land valuation best serve her appraisal purposes, then in **0 we have +,1* net income

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1This includes the +0/,4** FrealG receivable plus +/,)** recorded as revenue on the *,*** bushelsproduced but not physically sold. Students may create a different account for this +/,)**, for e#ample,Hnbilled 8eceivables, which is fine.-"f you assume that the case statement F3rennell withdrew most of the earningsG means that 8etained!arnings at the beginning of the year was 9ero, then the **0 drawings can be determined as follows6

Sales Collections Prod!ction

Beginning 8etained !arnings........................................... + * + * + *lus6 >et "ncome.............................................................. 24,44* )/1,* ,1*=ess6 !nding 8etained !arnings....................................... )*,-/* 0,00* )1/,4**

Drawings............................................................. +)2,11* +)2,11* +)2,11*

Case 5 - 3: Joan Holtz (A)

&ote6 $his case has been upate 6rom the 7le8enth 7ition!

Approach

These problems are intended to provide a basis for discussing questions about revenue recognition that

are not dealt with e#plicitly in the te#t and that are not sufficiently involved to warrant the construction ofa regular case. "nstructors can pic from among those listed. Some of them can be used as a tae5off pointfor elaboration and e#tended discussion by adding F@hat ifJG facts.

Ans8ers to 2!estions

). "f electricity usage tended to be fairly constant from month to month, one could argue in this case forbasing reported revenues solely on the actual meter readings6 the unreported usage in Decemberwould be reported in Manuary, and overall revenues for this year would not be materially misstated.Stated another way, if revenues are based solely on meter readings, the December **4 post5readingusage %which is recorded in Manuary **1& is, in effect, assumed to be the same **1 post5readingusage. rior to passage of the )/-4 Ta# 8eform Act, this approach was permitted for income ta#purposes. The )/-4 act requires the more acceptable %due to better matching& practice6 estimating

actual usage for the part of December after meters are read and reporting that usage as part of therevenues of that year. This is more sound accounting, in that with weather fluctuations and energyconservation efforts, it is questionable whether the post5reading usage in December **4 would infact not differ materially from the post5reading usage in December **1. The same problem e#ists foroperators of vending machines. The postal service has the opposite problem6 it receives cash fromstamp sales before all of the stamps are used. "t carries a liability %unearned revenues& for this effect.Both of these e#amples illustrate that even when cash is involved, the measurement of revenue is notnecessarily straightforward.

. This is one of the problems whose FtrueG resolution depends on events that cannot be forseen atthe end of the accounting period. Some firms count the whole +)*,*** as revenue in **4 on thegrounds that it is in hand and that any specific services are undefined andor separately billable.

Ethers tae the more conservative approach of counting only +0,*** as revenue in **4 on thegrounds that the service involved is Freadiness to serve,G and that this readiness e#ists equally in eachyear. " prefer the latter approach, based on the matching concept.

. Iany would argue that the service involved is the cruise and that no revenue has been earneduntil the cruise has been completed. Ethers maintain that 8aymond's has completed its FserviceG ofarran"in"the cruise, that it is e#tremely unliely that events will happen in **1 that will change itsprofit of +*,***, and that the amount is therefore revenue in **4. "ntroduction of the possibility of arefund lessens the strength of the argument of the latter group. This position can be weaened further

)*


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Ianufacturer A from inflating its **4 revenues and income by the sort of repurchase agreementdescribed. FASB ;


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o. )*)6 F8evenue 8ecognition in ?inancial Statements555?requently Ased Cuestionsand Answers.G

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poses to the company. It may have to defer more revenue than it did before it adopted SAB 101.

Question 2s purpose is to give the subsequent class discussion of the individual sale transactions a

managerial perspective, which should help to make what could be a dull accounting discussion more

relevant to the students. The revenue recognition decisions Fisher must make in the next quarter have

potentially significant adverse consequences for the company. The accounting decisions are important

managerial decisions.

Question 3 should take up the bulk of the class. As each sale transaction accounting issue is resolved, the

instructor should ask the class to explain the accounting entries required by the conclusion. To test the

students understanding of their conclusions, the instructor should ask the class to reconsider the facts of a

resolved situation with modifications. For example, in the Technical Devices Division example the

instructor might change the case facts by stating the division seldom, if ever in the past accepted product

returns from distributors. Then, the instructor should ask, Does this fact change alter your decision?

The final question should lead to an open discussion, which the instructor should focus on whether

accounting standards should be stated in general principles (revenue should be recognized when earned

and realized) or detailed guides (SAB 101). This is a fundamental accounting standard setting issue. Forexample, many believe the International Accounting Standards Committees (IASC) approach to writing

standards is preferable to the Financial Accounting Standards Boards (FASB) approach. The IASC

writes standards in terms of general principles with some guidelines on their application and then leaves it

up to management to apply the standard in a way that reflects the particular facts of the situation. In

contrast, the FASB writes standards that are more like cook books. They are more like SAB 101, which

is very detailed in its guidance and much more restrictive in its permitted use of judgment.

SA; 1/1

The general rule governing revenue recognition is6

8evenue should not be recogni9ed until it is reali9able and earned.

Because the general rule has been abused by some companies, more specific criteria for revenuerecognition have been prescribed by the S!( in SAB )*). As a result, revenue is now considered to bereali9ed and earned when6

ersuasive evidence of an order arrangement e#ists,

Delivery of the ordered goods has occurred or services have been rendered6

The seller's prince to the buyer is fi#ed or determinable, and,

(ollectibility of the sale proceeds is reasonably assured.

9ersuasi8e 78ience

urchase order and sale agreement documentation practices vary widely between customers, companies,and industries. The S!( appears to be willing to accept as persuasive evidence of an agreement thesepractices as long as there is some form of written or electronic evidence that a binding final customerpurchase authori9ation, including the terms of sale, is in the hands of the seller before revenue isrecogni9ed.

>eli8er

)2


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The period before the remaining obligation will be e#tinguished is lengthy. 8egistrants should

consider whether reasonably possible variations in the period to complete performance affect thecertainty that the remaining obligations will be completed successfully and on budget.

The timing of payment of a portion of the sales price is coincident with completing performance

of the remaining activity.

The second e#ception is a multiple5element deliverables sales arrangement. "n this case, a portion of thecontract revenue may be recogni9ed when the seller has substantially completed or fulfilled the terms of aseparate contract element. ending additional accounting guidance, on multiple5element revenuearrangements, the S!( indicated that it will accept any reasoned method of accounting for multiple5element arrangements that is applied, consistently and disclosed appropriately. The S!( will not ob$ect toa method that includes the following conditions.

To be considered a separate element, the product or service represents a separate earnings

process.

8evenue is allocated among the elements based on their fair value.

"f an undelivered element is essential to the functionality of a delivered element, no revenue is

allocated to the delivered element until the undelivered element is delivered.

"n the case where a customer is not obligated to pay a portion of the contract price allocable to deliveredequipment until installation or similar service, recognition of revenue on the delivered equipment may berecogni9ed if the installation is not essential to the functionality of the equipment. !#amples of indicatorsthat installation is not essential to the functionality of the equipment include6

The equipment is a standard product.

"nstallation does not significantly alter the equipment's capabilities.

Ether companies are available to perform that $ob.

(onversely, e#amples of indicators that the installation is essential to the functionality of the equipmentinclude6

The installation involves significant changes to the features or capabilities of the equipment or

building comple# interfaces or connections.

The installation services are unavailable from other vendors.

(ontractual customer acceptance provisions must be satisfied before revenue can be recogni9ed.

(ustomer acceptance provisions typically come in one of four forms6

). Acceptance provisions in arrangements that purport to be for trial or evaluation purposes.

"n substance, these transactions are consignment5type sales, and revenue should not be recogni9ed untilearlier of acceptance or the acceptance provisions lapses.

. Acceptance provisions that grant a right of return or e#change on the basis of sub$ective matters.. Acceptance provisions that grant a right of replacement on the basis of seller5specified ob$ective

criteria.

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Revenue Recognition Methods

Boston Automation Systems has adopted the following revenue recognition policies.

1. Recognize revenue upon product shipment

2. Recognize service revenue ratably as service is provided over the period of the related contract.3. Recognize long-term contract revenue using the percentage-of-completion accounting method

4. Revenue from multi-deliverables contracts is allocated to each deliverable based upon the

amounts charged for each deliverable when sold separately.

5. The company provides estimated warranty costs when product revenue is recognized.

The instructor should ask students to explain the accounting entries for each revenue recognition policy as

it is identified by the class. At the end of this part of the discussion the instructor should ask a student to

explain the accounting entries the company will make to record the cumulative effect adjustment resulting

from the change in accounting principles.

The recognition policy most likely to be impacted by SAB 101 is recognize revenue upon product

shipment. In particular, those sale transactions that involve customer acceptance and unfulfilledobligations subsequent to shipment.

While the students do not know it, the instructor should be aware that SAB 101 specifically excludes the

percentage-of-completion accounting method from its scope.

Fishers Concerns

An examination of Boston Automation Systems consolidated financial statements clearly shows that the

company has been growing both its sales and net income at a double-digit rate. If more revenue must be

deferred as a result of applying SAB 101, this high growth rate might be harder to manage or achieve in

the future. On the other hand, deferral of product sale revenue (when combined with the unearned servicerevenue already on the balance sheet) may dampen some of the cyclical industry effect on the volatility of

its companys revenues and earnings. A change in the revenue recognition methods may lead some to

question the companys rebound from its 1998 problems (excess inventory and lower profits.)

The Advanced Technology Division appears to be the division that will most likely to be impacted by

SAB 101. It sales transactions involve complex equipment and appear often to involve significant

installation and equipment performance obligations.

The troubled Technical Devices Divisions sales strategy shift and the related inventory loading of its

distribution channels might lead to an adverse earning quality reaction by investors if the division booked

the mechanical testing device sales immediately and investors learned of it. Fisher should be concerned

about this possibility.

Fisher might find the cumulative effect adjustment troublesome. It will be a charge to earnings and a

credit to deferred revenues. Some investors may react negatively to this one-time charge thinking it

implies the company had been too aggressive in its past revenue recognition practices by recording

revenue (and earnings) prematurely.

Fisher should also recognize that the companys general revenue recognition policy needs to change. In

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Upon delivery, the division has completed the earnings process and met the delivery criterion with respect

to the equipment because it has demonstrated that the equipment delivered to the customer meets the

requirements of the customers order. However, because the customer is not obligated to pay the division

if installation of the equipment is not completed, no revenue may be recognized until installation is

complete and the customer becomes obligated to pay. Conversely, if the division has an enforceable claim

at the balance sheet date through which it can realize some or all of the $20 million fee even if it failed to

fulfill the installation obligation, deferral of a lesser amount, but not less than the estimated fair value of

the installation (i.e., $500,000), would be appropriate.

Alternatively, if the divisions policy is to defer all revenue until installation is complete, recognition of

the $20,000,000 fee upon completion of installation would be appropriate. The divisions policy should

be appropriately disclosed and consistently applied.

Micro Applications, Inc.

Upon delivery, the division has completed the earnings process and met the delivery criterion with respect

to the equipment because it has demonstrated that the equipment delivered to the customer meets the

requirements of the customers order. In addition, the buyers obligation to pay the fee is not contingentupon completion of installation. Therefore, the division should recognize the revenue allocable to the

equipment, $19,500,000, as revenue upon delivery. The remaining $500,000 of the arrangement fee

should be recognized when installation is performed.

Alternatively, if the divisions policy is to defer all revenue until installation is complete, recognition of

the $20,000,000 fee upon completion of installation would be appropriate. This policy should be

appropriately disclosed and consistently applied.

XL Semi, Inc.

The XL Semi, Inc., order is one unit for accounting purposes, rather than an equipment sale, and aninstallation sale. Installation of the equipment would affect the quality of use and the value to the

customer of the equipment. Likewise, the equipment is essential to the value of the installation.

Additionally, because neither deliverable can be purchased from another unrelated vendor, the separate

deliverables in the arrangement do not meet the criteria for segmentation. Further, due to the specialized

skill involved in the installation of the equipment, installation is considered to be substantive, rather than

inconsequential or perfunctory. There is a strong presumption that the revenue recognition should be

delayed until customers acceptance is obtained following the completion of installation.

Technical Devices Division

The passing of title, the absence of evidence that the distributors do not have the capability to pay for the

devices and the products established market acceptance support immediate revenue recognition with aprovision for anticipated returns. However, the unsettled state of the product market, the uncertainty

surrounding the future sales level, and the absence of historical return data for distributor sales to high

volume customers argues for revenue deferral on the grounds that return provisions cannot be estimated

reliably.

The distributors unusual extended payment terms, reflecting the expected sell-through of the mechanical

testing devices coupled with the divisions past generous unwritten return practices suggest that the so-

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manufacturers like Boston Automation Systems with significant post-delivery obligations (they had to

defer rather than recognize income immediately).

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