Financial Accounting Homework 1

2. A.

a) This general policy follows GAAP, because under GAAP, revenue is recognized when it is earned and realized or realizable. Revenue is earned when goods or services are delivered or performed; and is realized or realizable when cash is received or cash collection is reasonably assured.

Lucent’s general policy goes strict. As said in the footnote, “Revenue is recognized when ... delivery has occurred, ...”, this equals to “earned”. “Revenue is recognized when persuasive evidence of an agreement exists, ... , the fee is fixed and determinable, and collection of the resulting receivable, including receivables of customers to which Lucent has provided customer financing is probable.” equals to “realized or realizable”.

Thus, Lucent’s general policy follows GAAP.

b) If Lucent does not follow this conservative accounting practice, then manipulation of earnings, such as channel stuffing can happen. Lucent can force its distributors to buy in all its stocks and recognize revenue, however it may not receive any cash and may then face the risk that those inventories might never sell out and the cash is not realizable.

c) For this type of sales, Lucent recognizes its revenue when title of installation passes to the customer, which usually is upon delivery of the equipment.

This is a relatively aggressive accounting practice because it recognizes the revenue before installation or integration actually happens. Thus they may face the risk that equipment is returned and cash is not receivable.

B.

a) According to GAAP, revenue is recognized when it’s earned and realized or realizable. In this case, revenue is not earned because no good and service is delivered at that time (contract begins on Nov. 1), although Lucent received $4 million.

Thus, no revenue is recognized.

b)

Asset = Liability + Equity

Cash Unearned Revenue

+4,000,000 +4,000,000

3.

a) $556,000 of bad debts expense is recognized on its Income Statement. $379,000 of...