Adapted from Deloitte TrueBlood Case 16-2 “The Cable Guys.”
CableCo, a customer of CoAx, has entered into a binding written agreement to purchase 1,000 feet of 18 American wire gage (AWG) coaxial cable for $3 per foot on March 1, 2018. Under the agreement, CoAx transfers legal title of the cable to CableCo on March 1, 2018 and is entitled to payment. Because CableCo is constructing a new warehouse, it is unable to take delivery of the cable and has requested in writing that CoAx store the cable in its warehouse until construction of CableCo’s warehouse is completed. CableCo’s warehouse will be completed three months from the time of purchase, at which time CableCo is required to take delivery of the cable. CoAx stores 18 AWG coaxial cable in 10,000-foot spools (spools of cable are considered finished goods and ready for shipment). CoAs will not physically segregate the cable that CableCo will purchase; rather, the Company will designate the quantity in its inventory tracking system as “sold.” Thereby preventing the use of the cable to fulfill other customer orders. In other words, CoAx will “virtually” segregate the inventory. CoAx does not have additional performance obligations with respect to the cable purchased by CableCo.
Instructions
Assume you work in the technical accounting group at CoAx. Write a memo analyzing this transaction and draw a conclusion about when revenue should be recognized. Specifically, is it appropriate for CoAx to recognize revenue before the date on which CableCo takes delivery of the 1,000 feet of cable? In answering this question, your response should 1) discuss the general principle for revenue recognition under ASC 606, Revenue from contracts with customers, 2) identify any specific guidance applicable to this transaction, and 3) discuss how that guidance applies to the facts of the case.
Hint: ASC 606-10-55-81 through 55-84 provides specific implementation guidance on bill-and-hold arrangements and why this guidance exists (that is, why we cannot simply use the five-step framework).
Your memo will be sent to the accounting staff responsible for recording revenue transactions. It will also be kept on file to provide to the auditors and respond to any future SEC comment letters. As such, a reader should understand what conclusion you reached and how you reached it. Your memo should also be concise and easy to understand. Try to limit your memo to one page in length.
