Case 14 3 Coconut Telegraph Essay

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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 …show more content…
Therefore, because the contracts are closely related to one another and happening nearly at the same time, they should be accounted for together.

4.) On the basis of the response to Question 3, how should Coconut account for the execution of the May 1, 2012, agreement? Provide the deferred revenue balance and cumulative revenue recognized related to the Buffett arrangement upon execution of the May 1, 2012, agreement.

VSOE of Fair Value
% of relative fair value
Allocated discount
Allocated arrangement consideration
Training service
$3,000
60%
$300
$2,700
PCS
$2,000
40%
$200
$1,800
Total
$5,000

$500
$4,500
Cumulative revenue recognized as of May 1, 2012
$10,286 Volcano System
+ 286 2 months of PCS from previous contract (1,714/12 = $143 each month)
$10,572 Total revenue recognized from February 1 contract

Deferred Revenue by May 1, 2012
$1,428 Remaining unearned revenue from first contract for PCS
+2,700 Training service from second contract
+1,800 PCS from second contract
$5,928

5.) Identify the IFRS literature applicable to the Buffet arrangement
IAS 18 prescribes the accounting requirements for when to recognize revenue from the sale of goods, services, and for interest, royalties and dividends. It says that revenue should be recognized until is both realizable and earned. Also, revenue is measured at the fair value of the consideration received or receivable and recognized when certain conditions are met which depend on the
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