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revenue recognition

Lookhere.Com and StopIn.Com enter into a reciprocal agreement whereby (1) StopIn.Com is given valuable advertising space on the home page of Lookhere.Com and (2) Lookhere.Com is given valuable advertising space on the home page of StopIn.Com. The main source of revenue for both StopIn.Com and Lookhere.Com is sales of advertising on their respective websites. Both companies recognize advertising revenue received from the other company and recognize advertising expense paid to the other company. Accounting regulators express support for the accounting treatment applied by these companies.
Required:

a. Do you believe these companies should be allowed to recognize revenue in conjunction with the advertising agreements described above?

b. Why do you believe these companies want to record revenue along with its offsetting expense for these transactions?

c. How would you assess such transactions in an analysis of these companies?

Solution Preview

Q. Do you believe these companies should be allowed to recognize revenue in conjunction with the advertising agreements described above?

A: Yes, as long as the swap has economic substance and is not a related party scheme to show activity that is not arms length.

Q. Why do you believe these companies want to record revenue along with its offsetting ...

Solution Summary

Your response is 168 words and explains the hard part of recording revenue with advertising swaps. The discussion is in everyday language (no jargon).

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