Share
Explore BrainMass

Acknowledging Revenue and Estimating Future Bad Debts

Acknowledging revenue and estimating future bad debts - please see attachment.

Rationale
It is important to understand how companies record revenue. The timing of the entry is important, and the rules related to the timing of revenue recognition must be followed to conform to GAAP. Also, it is important to understand how to value the accounts receivable account. It should be valued at its net realizable value or the value that the company expects to receive.
Instructions: First, complete a set of tables (provided below) detailing Calliope's accounts. Then, write an e-mail to Jan Waters summarizing this information.

Hi,
I'm Jan Waters, the controller for Calliope Knowledge Solutions. Welcome to the company. It's good to have you with us. I wanted to talk to you about your new project.
Calliope provides professional education courses. Our top priorities are to offer a low-cost product and exceed market competition and product innovation and customer service.
Our students are busy and need to balance home, work, and other commitments. Through feedback and surveys, we learned that students want courses they can access any time: days, nights, and weekends.
To accommodate this, we recently started offering Internet-based courses. These courses allow our students to learn on their schedule; they are no longer tied to a traditional classroom.
It's important that we respond to our customers and offer innovative products that suit their needs. In addition, Internet-based education allows us to further enhance revenue and cash flows and tap into an international demand for continuing professional education.
I appreciate your help with the decision-making process as we decide on our next steps regarding Calliope's expansion plan.
Here's a summary of the company's current status.
Calliope began the planning process for creating online course offerings a little more than a year ago. The initial market research indicated that Calliope would have a moderate start with a slow (10 percent) increase in demand per year. However, our current market research indicates that the demand will actually be much greater. We've already found this to be true?student enrollment in the first three months of the online courses is much higher than we anticipated. Based on these data, we think there will be many more students in our first year than we originally forecasted.
Although this is good for Calliope, it may stretch other areas of the company beyond their current capacity. For instance, I've discussed these issues with Ted Chen in IT. He informed me that these enrollment levels will quickly outpace our current course infrastructure. So we may need to expand our operation.

Now that Calliope has begun to offer online courses, the company needs to consider several important issues. For instance, when should revenue be acknowledged for the online course offerings? How should Calliope account for the possibility of customer bad debts for the online courses?

Step 1
Use the tables below to display the requested information for this task. The number of rows in each table is not indicative of the number of accounts affected. Feel free to add or remove rows as necessary.

Step 2
Write a 450-word e-mail to Jan Waters summarizing the information you provided in the tables. Your e-mail should recommend when Calliope should recognize revenue on the new online course offerings. Also, discuss the most appropriate way to handle potential bad debts for the new course offerings. Your e-mail should answer the following questions:

When should Calliope acknowledge revenue on its online course offerings?
What are the relevant issues in deciding when revenue should be recognized?
Which accounts are affected when a company records revenue? Consider whether the sale is for cash or on account.
Which accounts are affected when a company makes an entry to account for future bad debts?
How are the balance sheet, income statement, and statement of cash flows affected by the above entries?
How should Calliope estimate the possible future bad debts of new online customers and accrue for these costs?
Which approach will help Calliope determine a reasonable estimate for this number?
What internal and external information could the company analyze?
Consider how the transaction affects other accounts with respect to the accounting equation or accounting box. For instance, an increase in a revenue account will increase retained earnings on the balance sheet, and an increase in an expense account will decrease retained earnings on the balance sheet.

Which accounts are affected when a company records a sale for cash?
Account affected Increase or decrease?

How is the balance sheet affected when a company records a sale for cash?
Account affected Increase or decrease?

How is the income statement affected when a company records a sale for cash?
Account affected Increase or decrease?

How is the statement of cash flows (using the direct method) affected when a company records a sale for cash?
Operating activities (list event) Cash inflow, cash outflow, or no change?

Which accounts are affected when a company records a sale on credit?
Account affected Increase or decrease?

How is the balance sheet affected when a company records a sale on credit?
Account affected Increase or decrease?

How is the income statement affected when a company records a sale on credit?
Account affected Increase or decrease?

How is the statement of cash flows (using the direct method) affected when a company records a sale on credit?
Operating activities (list event) Cash inflow, cash outflow, or no effect?

Which accounts are affected when a company sets up an allowance for future bad debts?
Account affected Increase or decrease?

How is the balance sheet affected when a company records an allowance for future bad debts?
Account affected Increase or decrease?

How is the income statement affected when a company records an allowance for future bad debts?
Account affected Increase or decrease?

How is the statement of cash flows (using the direct method) affected when a company records an allowance for future bad debts?
Operating activities (list event) Cash inflow, cash outflow, or no effect?

Attachments

Solution Preview

Rationale
It is important to understand how companies record revenue. The timing of the entry is important, and the rules related to the timing of revenue recognition must be followed to conform to GAAP. Also, it is important to understand how to value the accounts receivable account. It should be valued at its net realizable value or the value that the company expects to receive.
Instructions: First, complete a set of tables (provided below) detailing Calliope's accounts. Then, write an e-mail to Jan Waters summarizing this information.

Hi,
I'm Jan Waters, the controller for Calliope Knowledge Solutions. Welcome to the company. It's good to have you with us. I wanted to talk to you about your new project.
Calliope provides professional education courses. Our top priorities are to offer a low-cost product and exceed market competition and product innovation and customer service.
Our students are busy and need to balance home, work, and other commitments. Through feedback and surveys, we learned that students want courses they can access any time: days, nights, and weekends.
To accommodate this, we recently started offering Internet-based courses. These courses allow our students to learn on their schedule; they are no longer tied to a traditional classroom.
It's important that we respond to our customers and offer innovative products that suit their needs. In addition, Internet-based education allows us to further enhance revenue and cash flows and tap into an international demand for continuing professional education.
I appreciate your help with the decision-making process as we decide on our next steps regarding Calliope's expansion plan.
Here's a summary of the company's current status.
Calliope began the planning process for creating online course offerings a little more than a year ago. The initial market research indicated that Calliope would have a moderate start with a slow (10 percent) increase in demand per year. However, our current market research indicates that the demand will actually be much greater. We've already found this to be true?student enrollment in the first three months of the online courses is much higher than we anticipated. Based on these data, we think there will be many more students in our first year than we originally forecasted.
Although this is good for ...

Solution Summary

The solution explains the various accounts that are affected when a company records a sale on cash and when a company records a sale on credit

$2.19