Coax Vs Cableco Case Study

Facts of the Case CoAx and CableCo have entered into a binding written agreement for CableCo to buy 1,000 feet of coaxial cable for $3 per foot. However, CableCo is building a new warehouse, so they currently don’t have anywhere to store the cable. They have asked CoAx to store the cable in their warehouse until CableCo’s warehouse is completed in three months. CoAx agrees to do so. They store the cable in spools holding 10,000 feet of cable, which are considered finished goods ready to be shipped. They will not physically set aside the 1,000 feet of cable that CableCo ordered, but will denote the quantity as sold in their system so that it cannot be used to fill another order. They have determined that CableCo has assumed risk of ownership,
they have a substantial reason for requesting this bill and hold, and CoAx has no additional performance obligations with respect to the cable purchased by CableCo.

Issues of the Case The key issue of this case concerns when CoAx should recognize revenue on this order from CableCo, specifically whether or not it is appropriate for CoAx to recognize revenue associated with this transaction before the date of delivery to CableCo.
Typically, revenue should be recognized when the control of the goods has transferred from the seller to the buyer or upon delivery of the goods unless it is a bill-and-hold sale. Therefore, another issue of this case is whether or not the transaction between CableCo and CoAx qualifies as a bill-and-hold sale.
Application of the Rules Several uncertainties and issues of this case come to light when referencing the aforementioned ASC rules. As outlined in ASC 606-10-25-1, the requirements for a contract to exist are clearly met between CoAx and CableCo. ASC 606-10-25-14 and ASC 606-10-25-30 clarify that CoAx owes CableCo
one performance obligation, delivery the cable, and this performance obligation will be satisfied at a point in time, upon delivery. The final two ASC rules referenced above outline the most prevalent issues of whether or not this transaction is a Bill and Hold Arrangement and when revenue should be recognized. There are four specific requirements that must be met for a transaction to qualify as a Bill and Hold Arrangement: the reason for the arrangement must be substantive, the product must be identified separately as belonging to the customer, the product currently must be ready for physical transfer to the customer, and the entity cannot have the ability to use the product or sell is to another customer. The first, second, and fourth qualifications are definitely met because CableCo asked CoAx to set the cable aside for them while their warehouse undergoes construction, the cable is in the tracking system as “sold” and has been segregated so it will not be sold to any other customer. However, the third requirement is not completely met in this case. The product must be completely set aside, packaged and ready for shipment in order for this to be a Bill and Hold situation, but CoAx has not only designated that 1,000 feet of a 10,000 foot spool will go to CableCo. It has not cut the 1,000 feet from the spool and packaged it for delivery to CableCo. It is possible to qualify this as a Bill and Hold Arrangement if this condition is not met in its entirety; and therefore, revenue should not be recognized.

Conclusion of Analysis
After determining that CoAx cannot recognize revenue at this time, the question arises of when they should recognize revenue.
If during the three months that CableCo’s warehouse is under construction, CoAx cuts, packages, and physically sets aside the specific amount of cable ordered by CableCo, they can recognize revenue at that point because all of the qualifications for a Bill and Hold Arrangement will then be met. If this occurs upon the day of delivery, then CoAx will have to wait until the day of delivery to recognize
revenue.