KTSB and RAMESSES II AGREEMENT
TASK ONE
A. After reviewing the specifics of the agreement between KTSB and Ramesses II in the attached
“KTSB and Ramesses II Agreement,” list the potential accounting issues related to KTSB’s
recognition of revenue on the sale of the computers to Ramesses II, including the following
for"each"accounting issue:
• the characteristics of the agreement that generated the revenue recognition issue
• the revenue recognition issue generated
B. Prepare a memo to KTSB’s management in which you address"each"of the issues you listed in
part A by doing the following:
1. Summarize the relevant facts of the scenario and agreement.
2. Describe the specific accounting issues.
3. Identify the appropriate authoritative guidance (topic, subtopic(s), section(s), and subsection(s))
for"each"issue using the” FASB Accounting Standards Codification Database” web link.
4. Analyze the research for the accounting issues.
5. Recommend an accounting treatment for"each"accounting issue.
A. The list of potential accounting issues related to KTSB’s recognition of revenue on the sale of the
computers to Ramesses II.
1. The agreement allowed Ramesses II to return any unsold products within 90 days of purchase.
2. Manufacturer’s coupon to be used within 90 days of purchase- reimbursement issue.
3. Gift card sales and the 3% commission- how and to handle the commissions from the sale of the
gift cards.
2
4. Warranty claims- how refunds or replacements of products affect revenue.
A. The characteristics of the agreement that generated the revenue recognition issue.
1. Ramesses II cannot discount the computers to its customers to help move inventory through its
warehouses; however, the agreement allowed Ramesses II to return any unsold product within 90
days of purchase (SKM1-SKM1 Task 1: Revenue Recognition, 2023).
2. KTSB developed a manufacturer’s coupon, entitling customers to $100 off Model E, with a 90-
day expiration date (SKM1-SKM1 Task 1: Revenue Recognition, 2023).
3.Ramesses II agreed to sell KTSB’s gift cards. KTSB agreed to pay a 3% commission to Ramesses
II on the value of the gift cards sold at Ramesses II (SKM1-SKM1 Task 1: Revenue Recognition, 2023).
4.Ramesses II will accept all warranty claims within the first year of sales to customers. KTSB has
instructed Ramesses II customers on the option of either a refund or exchange for a new Model E
computer. KTSB will refund Ramesses for the refund or the exchange amount and shipping costs.
After the first year, all claims must be made to KTSB (SKM1-SKM1 Task 1: Revenue Recognition,
2023).
A. The revenue recognition issue generated;
1.The return of unsold products involves the issue of accounting for a refund liability.
2.Using a coupon to assist in paying for the product involves a non-cash consideration that affects
revenue recognition.
3. Selling the gift cards involves the issue of timing when the gift cards are sold and how to account
for the 3% commission.
3
4.Warranty claims involve the issue of how to account for the claims from customers during the
specified time.
B. Prepare a memo to KTSB’s management to address each of the issues you listed in part A.
To: KTSB Management
From:
Subject: Revenue recognition in the contract and agreement between KTSB and Ramesses II.
On July 16th, KTSB received a purchase order from Ramesses II to purchase 300 Model E
computers to sell. Ramesses II is a well-established company with stores in every state and an
online sales presence. This order is vital to the growth of KTSB but has complications that pertain
to the recognition of revenue.
Ramesses II agreed to sell the Model E computers with no allowable discount and can return all
unsold computers to KTSB within 90 days of purchase. In addition, KTSB allowed Ramesses II
to accept $100 manufacturer coupons, which allowed customers to purchase the computers for
less than the original price. Ramesses II would be reimbursed by KTSB for any coupons used
within 90 days by Ramesses II customers. Likewise, Ramesses II also agreed to sell KTSB’s gift
cards at their kiosks and Ramesses II would receive a 3% commission on the value of the gift
cards. Finally, Ramesses II will accept all warranty claims from customers at the company
warehouses for computers sold within the first year of sales. Customers would have the option of
a refund or an exchange for a new Model E computer. KTSB will reimburse Ramesses II for any
refunds, exchange amounts, plus shipping costs for any computers returned by customers. Any
claims after the first-year expiration will be made directly to KTSB.
Accounting Issues & Analysis
4
When Ramesses II returns unsold Model E computers, KTSB needs to recognize a refund liability
according to ASC 606-10-32-10. In the ASC standard, “if an entity receives consideration from a
customer and expects to refund some or all of that consideration, the entity shall recognize a
refund liability.” (FASB Accounting Standards Codification, 2023). The entity, KTSB, will measure the
refund liability from returned computers, based on the amount refunded. Revenue will then be
adjusted to reflect the amount of refund.
Ramesses II was allowed to accept $100 manufacturer’s coupons for the sale of the Model E
computer by customers. Ramesses II also sells KTSB’s gift cards through their kiosks. According
to ASC 606-10-32-21 through 606-10-32-24, these coupon amounts, and gift cards are considered
a noncash consideration. In the ASC standard; “when a customer promises consideration in a form
other than cash, an entity shall measure the estimated fair value of the noncash consideration at
fair value of the noncash consideration at contract inception.” (FASB Accounting Standards
Codification, 2023). “If an entity cannot reasonably estimate the fair value of the non-cash
consideration, the entity shall measure the consideration indirectly by reference to the standalone
selling price of the goods or services promised to the customer in exchange for the consideration.”
Relative to the gift card sales referenced in the above paragraph, ASC 405-20-40-3, “Prepaid
stored-value products are products in physical and digital forms with stored monetary values that
are issued for the purpose of being commonly accepted as payment for goods or services.” (FASB
Accounting Standards Codification, 2023). The gift cards are an example of the prepaid store-valued
products that can be redeemed at the merchant locations for products. The commission for the gift
cards will be treated as a liability as they are sold.
KTSB has instructed Ramesses II to accept any warranty claims for the Model E computers
within the first year of sale at any of their warehouses and to either refund or exchange the
5
computer. According to ASC 606-10-55-30, “it is common for an entity to provide a warranty in
connection with the sale of a product.” (FASB Accounting Standards Codification, 2023). Warranties
can vary depending on the industries and contracts. The warranty provided by KTSB provides
customers the assurance that the Model E computers will function as the specifications indicate.
Recommendation
Based on the accounting issues and analysis in the above paragraphs, KTSB should follow these
recommendations to recognize revenue in their financial statements in the contract with Ramesses
II. By adhering to these recommendations, KTSB shall be compliant with the rules under the
FASB, Accounting Standards Codification (ASC).
In the case of any unsold computers returned by Ramesses II within the 90-day return period,
KTSB should account for a refund liability for the returned computers. Depending on how
Ramesses II has or will pay for the computers, this refund liability will reduce the revenue or
accounts receivable and increase the liabilities for the sales period.
The $100 manufacturer’s coupons that are redeemed when the specified Model E computer is
purchased provide a discount on the sale price. The price reduction will be recorded as a reduction
in the revenue for the sales of the computers. The coupons will not be recognized until they are
redeemed due to the uncertainty associated with redemption.
Per ASC 405-20-40-3, “Prepaid stored-value products are products in physical and digital forms
with stored monetary values that are issued for the purpose of being commonly accepted as
payment for goods or services.” (FASB Accounting Standards Codification, 2023). The accounting for
the gift cards would be recorded as a deferred revenue until a gift card is redeemed. After a gift
card is redeemed, it would be recognized as revenue and the commission paid to Ramesses II
would be recorded as a commission expense.
6
KTSB will also accept all warranty claims from Ramesses II within the first year of the contract.
Although claims are not specifically known at the time, it is stated in the scenario that only 5% of
customers historically have filed claims for the computers (SKM1-SKM1 Task 1: Revenue Recognition,
2023). KTSB should estimate the warranty claims equivalent to the 5% of claims made in the past.
KTSB would then debit warranty expense and credit and accrued warranty liability for the
estimated warranty claims.
7
References
FASB Accounting Standards Codification. (2023, December 26). Retrieved from asc.fasb.org:
https://asc.fasb.org/1943274/2147479866/606-10-32-10
SKM1-SKM1 Task 1: Revenue Recognition. (2023, December 26). Retrieved from WGU:
https://tasks.wgu.edu/student/001334425/course/22020009/task/3253/overview
Powered by TCPDF (www.tcpdf.org)
