Mesmerizing Marketers (MM) is a marketing company that offers avariety of marketing offerings to its customers. Specifically:
• MM will create a TV commercial for $1M, build an app for$500K, and build a Facebook page for $250K. These amounts representMM’s charges for these items when MM sells them separately tocustomers. The TV commercial, the app, and the Facebook page arenot interrelated; that is, each functions independently of theother offerings.
• If a customer purchases all aforementioned items together, thetotal cost is $1.5M. Payment terms are 50 percent consideration dueat contract signing, with the remaining 50 percent due over therest of the development period (25 percent at mid-point, 25 percentat completion).
• If the app is downloaded 500K times or more in the firstmonth, there is a one-time bonus of $250K payable to MM.
Stone, a customer, approaches MM with the hopes of reinventingits image to a younger customer base. Stone has a verbal agreementwith MM that is based on MM’s unsigned quote to Stone on November30, 20X5, for one TV commercial, one app, and a Facebook page. Theagreement creates enforceable rights and obligations pursuant toMM’s customary business practices. None of these items can beredirected by MM to another customer. MM performed a credit checkon Stone and has determined that Stone has the intention andability to pay MM for fulfilling its portion of the contract. Stoneis required to pay MM for performance completed to date if Stonecancels the contract with MM for reasons other than MM’s failure toperform under the contract as promised.
Stone makes a payment on November 30, 20X5, in the amount of$750K pursuant to the agreement. From the date of the quote, ittakes MM six months to develop and produce the TV commercial, twoweeks to complete the Facebook page, and three months to complete afully functioning app. MM does not think that the app will bedownloaded 500K times in the first month because Stone’s customerbase does not quickly accept newly developed technology. On thebasis of its experience with similar technology, MM has determinedthat it takes over three months for Stone’s users to begin todownload its apps.
Required
MM’s CFO is trying to understand the new revenue recognitionmodel and has asked you to explain how MM would account for theabove scenario under the new standard.
1. How should MM account for the above offering with Stone underthe new revenue recognition model?
2. How would your conclusions change if: a. The app sold toStone is actually downloaded more than 500K times in the firstmonth?
