LMC Solutions(LMC) is a publicly-traded marketing company that offers a variety
ID: 2576648 • Letter: L
Question
LMC Solutions(LMC) is a publicly-traded marketing company that offers a variety of marketing offerings to its customers. Specifically: • LMC will create a TV commercial for $1M, build an app for $500K, and build a Facebook page for $250K. These amounts represent LMC’s charges for these items when LMC sells them separately to customers. The TV commercial, the app, and the Facebook page are not interrelated; that is, each functions independently of the other offerings. • If a customer purchases all aforementioned items together, the total cost is $1.5M. Payment terms are 50 percent consideration due at contract signing, with the remaining 50 percent due over the rest of the development period (25 percent at mid-point, 25 percent at completion). • If the app is downloaded 500K times or more in the first month, there is a one-time bonus of $250K payable to LMC. Acme Equipment Co., a customer, approaches LMC with the hopes of reinventing its image to a younger customer base. Acme has a verbal agreement with LMC that is based on LMC’s unsigned quote to Acme on January 15, 2018, for one TV commercial, one app, and a Facebook page. The agreement creates enforceable rights and obligations pursuant to LMC’s customary business practices. None of these items can be redirected by LMC to another customer. LMC performed a credit check on Acme and has determined that Acme has the intention and ability to pay LMC for fulfilling its portion of the contract. Acme is required to pay LMC for performance completed to date if Acme cancels the contract with LMC for reasons other than LMC’s failure to perform under the contract as promised. Acme makes a payment on January 15, 2018, in the amount of $750K pursuant to the agreement. From the date of the quote, it takes LMC six months to develop and produce the TV commercial, two weeks to complete the Facebook page, and three months to complete a fully functioning app. LMC believes there is 40% chance that the app will be downloaded 500K times in the first month. Required: Explain how LMC will determine the appropriate amounts of revenue to recognize under this contract. Your explanation should include all steps LMC must complete in the revenue recognition process and should identify the amounts and timing of LMC’s recognition of revenue. Cite appropriate authoritative support for your answer.
Explanation / Answer
If a customer purchases TV commercial, building an app and Face book page, all together, then the total cost is $1.5M, as LMC Solutions(LMC) offers 14.28% discount to its customers $1,750,000 ($1,000,000+$500,000+$250,000-$250,000)*14.28% = $1,500,000.
Even though the contract is not legally signed between Acme and LMC Solutions(LMC), they both had verbally agreed an agreement for providing marketing services. Accordingly Acme paid 50% on January 15, 2018 as per the payment terms after the verbal agreement.
Since the marketing services TV commercial, the app, and the Face book page are not interrelated, any revenue earned from respective services needs to be recognized separately and also any cost associated with that should also be captured under respective services.
Revenue should be recognized when it is earned irrespective when the actual amount is received.
TV commercial
App building
Face book page
Total
Total project value
10,00,000
5,00,000
2,50,000
17,50,000
Less: Trade discount = 14.28%
142836.00
71435.00
35729.00
2,50,000
Net amount to be received from customers
8,57,164
4,28,565
2,14,271
15,00,000
Time required to complete service
180 days (6 months)
14 days
90 days (3 months)
Monthly revenue recognition
1,42,861
428565.00
71423.67
6,42,849
Amount received on January 15
2,14,290
428565.00
107145.00
7,50,000
($750,000-$428565)=$321,435*6/9
($750,000-$428565)=$321,435*3/9
Deferred revenue
-71,429
-35,721
-1,07,151
($214,290-$142,861)
($71,423.67-$107,145)
Complete details of contract of LMC’s failure is not clearly mentioned in question, hence 40% chance of app download is not considered.
TV commercial
App building
Face book page
Total
Total project value
10,00,000
5,00,000
2,50,000
17,50,000
Less: Trade discount = 14.28%
142836.00
71435.00
35729.00
2,50,000
Net amount to be received from customers
8,57,164
4,28,565
2,14,271
15,00,000
Time required to complete service
180 days (6 months)
14 days
90 days (3 months)
Monthly revenue recognition
1,42,861
428565.00
71423.67
6,42,849
Amount received on January 15
2,14,290
428565.00
107145.00
7,50,000
($750,000-$428565)=$321,435*6/9
($750,000-$428565)=$321,435*3/9
Deferred revenue
-71,429
-35,721
-1,07,151
($214,290-$142,861)
($71,423.67-$107,145)
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