Caltron Electronics, Inc. Reporting
ACC 541 – Accounting Theory and Research
April 22, 2013
To: Scott Calvin, Chief Financial Officer
From: Chief Financial Analyst
Subject: Peale, Gower & Quill Audit Report
Date: April 22, 2012
Results of the audit report prepared by Peale, Gower & Quill raised concern’s regarding four transactions and revenue recognition. Transactions in question involve Unix-based, high power minicomputers causing a total market capitalization in excess of $450 million. Currently, Caltron Computers, Inc. recognizes revenue when minicomputers are shipped. Orders involving bill-and-hold are recognized by the entire amount recorded as ...view middle of the document...
$190,000 was paid as a down payment under an agreement that Calton would hold the systems and assist BTO in finding leases. $950,000 of revenue was recognized in 2011. One lease was found and in negotiation stages as of December 31, 2011.
Harvey Industries purchased a minicomputer system on a four-month trial bases. $220,000 of revenue was recognized. $110,000 was allotted to allowance for sales and returns. On November 27, 2011 the system shipped. Harvey paid $110,000 when the system shipped.
The Securities and Exchange Commission (SEC) outlines revenue recognition requirements through SAB Topic 13. SAB Topic 13 explains that proper revenue recognition cannot occur until the transaction is realizable and earned (FASB Accounting Standards Codification, 2013). Usually this is valid by the time the product has been delivered. However, Caltron recognizes revenue when product is shipped, which does not ensure collectability or delivery making revenue recognition premature. Two transactions are based on bill-and-hold arrangements. To recognize bill-and-hold transactions without delivery: the risks of ownership must have passed by the buyer; the customer must have made a fixed commitment to purchase the goods; the buyer, not the seller, must request that the transaction be on a bill and hold basis having a substantial business purpose; there must be a fixed schedule for delivery of goods; the seller must not have retained any specific performance obligations such that the earning process is not complete; the ordered goods must have been segregated from the sellers inventory; the equipment must be complete and ready for shipment (FASB Accounting Standards Codification, 2013).
The Elegant Housing transaction collected $20,000 at the time of sale. Because the transaction is based on a six-month trial the collectability is not reasonably ensured, thus violating proper revenue recognition. SAB Topic 13 notes that collectability must be reasonably assured in FN6 with further explanation in FASB 605-10-25-3 (FASB Accounting Standards Codification, 2013).