#1-E) Experience with Revenue Recognition---
Do you have any experience related to revenue recognition?
#2-Please read the financial statement analysis case (Merck & Johnson & Johnson) on page 613, Chapter 12. Please read the instructions for (a), (b), and (c) and address the three questions that are asked.
Case Merck & Johnson & Johnson are two leaders producers of health care products. Each has considerable assets, and each expends considerable funds each yea toward the development of new products. The development of a new health care product is often very expensive, and risky, New products frequently must undergo considerable testing before approval for distribution to the public. For example, it took Johnson & Johnson 4 years and $200 million to develop its 1 Day ACUVUE contact lenses. Below are some basic data complied from the financial statements of these two companies.
All dollars in million Johnson & Johnson Merck
Total assets $53,317 $42,573
Total Revenue 47,348 22,939
Net Income 8,509 5,813
Research and development
expenses 5,203 4,010
Intangible assets 11,842 2,765
A) What kind of intangible assets might a health care products company have? Does the composition of these intangibles matter to investors-that is, would it be perceived differently if all of Merck's intangibles were goodwill, than if all of its intangibles were patents?
B) Suppose the president of Merck has come to you for advice. He has noted that by eliminating research and development expenditures the company could have reported $1.3 billion more in net income. He is frustrated because much of the research never results in a product, or the products take years to develop . He says shareholders are eager for higher returns, so h is considering eliminating research and development expenditures for at least a couple of years. What would you advise?
C) The notes to Merck's financial statements note that Merck has goodwill of $1.1 billion. Where does recorded goodwill come from? Is it necessarily a good thing to have a lot of goodwill on your books?
(Recognition of Profit and Entries on Long Term Contract)
On March 1, 2007, Winter Company entered into a contract to build an apartment building. It is estimated that the building will cost $2,000,000 and will take 3 years to complete. The contract price was $3,000,000. The following information pertains to the construction period.
2007 2008 2009
Cost to date $ 600,000 $1,560,000 $2,100,000
Estimate cost to
Complete 1,400,000 390,000 -0-
Progress billing to date 1,050,000 2,100,000 3,000,000
Cash collected to date 950,000 1,950,000 2,750,000
A)- Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
B)- Prepare all necessary journal entries for 2009.
C)- Prepare a partial balance sheet for December 31, 2008, showing the balances in the receivables and inventory accounts.
#4-What are your thoughts on any aspect of the FASB Project on Revenue Recognition shown in the following link? I think there are some really good revenue recognition thoughts by accounting theory giants that are worth a read in some of the links included in the link below.
This solution of 857 words shows step-by-step explanations on what tangible assets health care companies have and also provides advice on the elimination of research. It also discusses the concepts of goodwill, gross profit, and the FASB Project on Revenue Recognition. All references used are included.