Biovail Corporation Revenue Recognition and Fob Sales Accounting

 1. How many truckloads of product are actually required to carry $10 million of product? Show your calculations.

Given:

a. 1 Wellbutrin XL tablet is estimated to be 1.5 cm3 (this includes the packing space)

b. A 18-wheeler trailer’s dimensions are: 17m x 4.5m x 2.5m

Since the tablet and the trailer are using different units of measurements we need to convert the trailer dimensions to centimeters before we can calculate the volumes.

To convert meters into centimeters the ratio is: 1meter = 100 centimeters

17m= 1,700 centimeters

4.5m = 450 centimeters

2.5m = 250 centimeters

To calculate volume:

Volume of a rectangular prism = a x b x c

Volume= 1,700 x 450 x 250

Volume = 191,250,000 cm3

c. To find out how many Wellbutrin XL tablets fit into a trailer

1.5x=191,250,000

X=127,500,000

d. How much revenue does Biovail get from a single pill? Biovail +400%(Distributor mark up)+35%(wholesaler margin) = $2.83

Biovail→Distributor→Wholesaler→Retailer

0.42←2.10 / 500%←2.83/135%=2.10

e. The total value of tablet in one fully loaded trailer

127,500,000 x 0.42= $53,550,000

One truck can carry $10 million worth of Wellbutrin XL tablet product.

2. How should the company recognize revenue based upon the two possible FOB structures mentioned in the case?

  According to GAAP, four conditions must be met in order to recognize revenue:

1. Persuasive evidence of an arrangement exists: although the case does not provide extra information on this aspect, it seems clear that there is an ongoing relationship between Biovail and the Distributor and that certainly there was a bill, purchase order and/or invoice in order to support this sale.

2. Seller’s price to the buyer is fixed or determinable: the case provides clear evidence in this aspect.

3. Collection is reasonably assured: given the ongoing relationship between Biovail and the Distributor, it appears evident that this aspect was probably covered as well.

4. Delivery has occurred or services have...