Revenue Recognition


Chapter 18

Accounting in Action: CM2
This morning before going to work, you read in the paper about a company that
the SEC is investigating for improper revenue recognition. lt is not clear from the
article what industry thrs company is in, but you start to wonder about the specific
recognition policies at CM2. You know that CM2 sells a product and a service,
and you are aware that its service contracts extend over variable lengths of time,
but you are unsure whether it includes upgrades in the sale price of its products.
When you arnve, you find Conner and Martin and ask how CM2
recognizes revenue. They indicate that there is only one way to record revenue
for a product and that is when the company ships the product. For an individual
service call, CM2 recognizes revenue when the service technician leaves the

company premises to provide the service to the customer. They are not quite
sure how the revenue from service contracts is recognized.


(a) V

Prepare a brief memo describing the various revenue recognition

methods acceptable for CM2. Recall that it sells products (with possible
upgrades included in the sale price), provides service on demand for
customers, and has service contracts that guarantee customers seMce
over a specified period of time. Also recall the “product” contains both
software and hardware and that each may be sold separately or as a

package. Access the FASB Accounting Standards Codification to provide

Continurng Case

authoritative support for the position articulated in your memo for each of
these categories.

(b) V

Access the 201210-K for Microsoft, tnc. within the sEC website

(www. sec. gov). Examine


icrosoft’s Significant Accounti ng

Pol ici es

(usually found in footnote 1). Write a memo to Conner and Martin

describing Microsoft’s revenue recognition policies, so that they will have a
better understanding of the issues faced by a firm in the software industry.

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