Theory Case

Theory Case: Recreational Vehicle Inc.

As we noted, there currently is a downturn in the economy- which has ultimately affected the business of RVI. In efforts to turnaround business, RVI has created several changes to their method of business including obtaining a bank loan from Barrick Bank in hopes to increase their overall net income and profitability.

1. Bidding process for billboard space: How to account funds

* RVI has stated they have received each of the ten bidders amounted bids of $25 000 each. This shows that revenues for the bidding process are recognizable because they are measurable and able to be collected by RVI. RVI stated that the $25 000 would serve only towards the bidding on the billboard space. Therefore, the bidding process is separate from the advertising contract(s) which would follow for the three accepted bidders. Being separate from advertising, the bidding process is argued that it has fully completed the set requirements and may now declare its earned revenue.

* Alternatively, the questionable length of the contract the bidding process may lead to defered revenue. Until bidders are sorted (accepted and denied), revenue would not be realized. Bidders would most likely account for the bidding cost of $25 000 as part of their advertising expense on their statements. The bidding revenue would therefore be dependent upon the revenues earned over periods of time. With this, bidders are unable to measure the considerations of the contract they would be entering into with RVI. Measurement uncertainty is due to the inability to measure the outcome of the actual transaction. The contingency of sales, terms of transaction and trial period are all uncertain to the bidders.

Although accepted bidders have not yet been determined, advertising expenses would be considered separate from the bidding process. RVI stated that the bidding fee of $25 000 represents ONLY the right to bid. Subsequent advertising fees for bidders would...