Case 14 3 Coconut Telegraph
Case 14-3 Coconut Telegraph
Background on Coconut Telegraph
Coconut Telegraph Corporation (Coconut) is a developer and provider of specialized customer billings and management software and systems. On February 1, 2012, Coconut had an arrangement with Buffet Worldwide Inc. (Buffet) to deliver the Volcano System and provide one year of post contract customer support (PCS). The PCS will start March 1, 2012. At the time of the arrangement, February 1, 2012, Buffet paid $12,000 for the Volcano System and the one year of PCS.
On May 1, 2012 Coconut agreed to provide Buffet with training services on the customer management system and one additional year of PCS. This second arrangement was made under a separate contract and Buffet paid $4,500 for the additional services.
1.) Is Coconut’s February 1, 2012, arrangement with Buffett within the scope of ASC 985-605?
The agreement with Buffett on February 1, 2012 is not within the scope of ASC 985. The agreement falls under the exception on ASC 985-605-15-4 paragraph e which states that the guidance on 15-3 does not apply to “software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.” Since the software of the Volcano System is sold with its hardware, which is a tangible product, and since the software components and non-software components of the hardware are needed for the hardware to work perfectly, it cannot be within the scope of ASC 985-605.
2.) On the basis of the response to Question 1, discuss the revenue recognition accounting literature that would be applied to each unit of accounting in the February 1, 2012, arrangement. Provide the cumulative revenue recognized and deferred revenue balance related to the Buffett arrangement as of April 30, 2012.
Coconut's February 1, 2012 arrangement with Buffet is within the
Background on Coconut Telegraph
Coconut Telegraph Corporation (Coconut) is a developer and provider of specialized customer billings and management software and systems. On February 1, 2012, Coconut had an arrangement with Buffet Worldwide Inc. (Buffet) to deliver the Volcano System and provide one year of post contract customer support (PCS). The PCS will start March 1, 2012. At the time of the arrangement, February 1, 2012, Buffet paid $12,000 for the Volcano System and the one year of PCS.
On May 1, 2012 Coconut agreed to provide Buffet with training services on the customer management system and one additional year of PCS. This second arrangement was made under a separate contract and Buffet paid $4,500 for the additional services.
1.) Is Coconut’s February 1, 2012, arrangement with Buffett within the scope of ASC 985-605?
The agreement with Buffett on February 1, 2012 is not within the scope of ASC 985. The agreement falls under the exception on ASC 985-605-15-4 paragraph e which states that the guidance on 15-3 does not apply to “software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.” Since the software of the Volcano System is sold with its hardware, which is a tangible product, and since the software components and non-software components of the hardware are needed for the hardware to work perfectly, it cannot be within the scope of ASC 985-605.
2.) On the basis of the response to Question 1, discuss the revenue recognition accounting literature that would be applied to each unit of accounting in the February 1, 2012, arrangement. Provide the cumulative revenue recognized and deferred revenue balance related to the Buffett arrangement as of April 30, 2012.
Coconut's February 1, 2012 arrangement with Buffet is within the