Case Study Of Longeta Is Entering Into A Contract With Magicon Inc.
2. Longeta’s reasoning for recording $5.8 million as a current revenue was that this part of the contract was related to the delivery of the software. Since the product was shipped by the September 30th year-end, Longeta thought that they were allowed to do this under the revenue recognition principle. The reasoning for the $1.2 million being recorded as deferred revenue was that this amount corresponded to updates and technical support services which had not been performed at the year-end. This deferred revenue is listed on the liabilities section of the balance sheet as the revenue has not yet been earned and is therefore a liability.
3. This letter states that Longeta is entering into a contract with Magicon Inc. per a previous discussion …show more content…
The letter from the vice president of sales to Magicon has significant impact on the accounting as the wording in the contingency statement pertains directly to the reasonable certainty of receiving payment. This uncertainty created here would reflect an uncertainty of payment which would require that revenue not be realized or recognized until it is reasonably certain. The fact that the revenue was recorded even though the collectability was uncertain is very fishy. If the deal falls through, even though this was stated as unlikely, Longeta will still temporarily benefit from the increased revenue recorded before …show more content…
The revenue recognition principle is not satisfied in this case with the current accounting methods used to record this contract’s performance obligations. Due to the fact that the receipt of revenue was not reasonably certain, Longeta should not have recorded the revenue for the year-end on September 30th. There is also no proof of the arrangement occurring which raises some red flags in this case. The product was also not delivered to the customer at the date of September 30th, it was only stated that Longeta had shipped the order. The $1.2 million cannot be recorded as a deferred liability as well because in the event that the two parties cannot reach mutually agreeable terms and conditions, Magicon has the right to back out, making the receipt of this service revenue also
3. This letter states that Longeta is entering into a contract with Magicon Inc. per a previous discussion …show more content…
The letter from the vice president of sales to Magicon has significant impact on the accounting as the wording in the contingency statement pertains directly to the reasonable certainty of receiving payment. This uncertainty created here would reflect an uncertainty of payment which would require that revenue not be realized or recognized until it is reasonably certain. The fact that the revenue was recorded even though the collectability was uncertain is very fishy. If the deal falls through, even though this was stated as unlikely, Longeta will still temporarily benefit from the increased revenue recorded before …show more content…
The revenue recognition principle is not satisfied in this case with the current accounting methods used to record this contract’s performance obligations. Due to the fact that the receipt of revenue was not reasonably certain, Longeta should not have recorded the revenue for the year-end on September 30th. There is also no proof of the arrangement occurring which raises some red flags in this case. The product was also not delivered to the customer at the date of September 30th, it was only stated that Longeta had shipped the order. The $1.2 million cannot be recorded as a deferred liability as well because in the event that the two parties cannot reach mutually agreeable terms and conditions, Magicon has the right to back out, making the receipt of this service revenue also