Financial Reporting & Analysis 1

Financial Reporting & Analysis 1

This case is designedto continue to develop your research and writing skills. These skills are critical for a successful career in accounting or finance. This case will account for 7% of your grade in accordance with the syllabus. Your grade for this assignment will be based on the technical accuracy of your responses as well as the clarity and organization of your writing. The assignment is to be completed individually. You may not discuss the case with anyone other than the professor. You will submit the case using “Turnitin” through Blackboard. The case will be due Tuesday April 2 at 11:30 a.m. You may turn the case in early. Please do not wait until the deadline to submit the case. I recommend that you submit the case well in advance. Any case not turned in by the deadline will receive a 30% grade reduction. Any case not submitted within 24 hours of the initial deadline will not receive credit. You must cite any knowledge or information that is not your own.

Case Facts:

Landline Corporation is a public company with a calendar year-end. Landline provides a wide
variety of telecommunications services to a number of different customer groups, including routing
calls to one of several providers of psychic services with whom Landline has contracts. In October
2012, a new psychic service provider, Psychics ‘R’ Us (PRU), enters into an agreement with
Landline, and Landline adds PRU to its providers of psychic services.
When a customer calls a particular ‘‘1-900’’ number, (1) Landline is responsible for routing the
call to PRU’s offices or to those of another psychic service provider, depending on the availability
of psychics to take the call, and (2) if one of PRU’s psychics answers the call, he or she provides
psychic advice to the customer.
The arrangement between Landline and PRU calls for Landline to bill the customer $5 per
minute spent using PRU’s ‘‘1-900’’ number. This per-minute charge is set by Landline and is
consistent with the amount charged per minute for advice from non-PRU psychics. The charge on
the customer’s bill notes the source of the billing as ‘‘Psychics ‘R’ Us.’’ Landline is responsible for
remitting $4 per minute to PRU. If a customer does not pay the $5 per minute, Landline is still
responsible for paying PRU the $4 net amount per minute for that customer’s usage of the ‘‘1-900’’
number.
All marketing for the psychic services is performed and paid for by PRU. Landline is not
mentioned in PRU’s marketing campaign. When the customer calls the ‘‘1-900’’ number and that
call is routed to PRU’s offices, the psychic that answers identifies himself or herself as ‘‘a psychic
with Psychics ‘R’ Us.’’

Case Requirements:

Landline is considering whether it should recognize revenue related to its arrangement with
PRU on a gross or net basis. In doing so, Landline asks for your help. Prepare a memo addressing
the following questions. Base your analysis of the following questions on the relevant authoritative
literature and discuss the support in that literature for your conclusions. Be sure to cite the relevant
components of the Codification (please see attached materials that describe how to login to the FASB Codification data base)in your discussion. Citations arenot required for journal entries.

1. What are the accounting issue(s) and the relevant components of the authoritative
literature? Assume, for purposes of interpreting the Codification, that Landline is the
‘‘entity.’’

2. Should Landline recognize revenue gross (i.e., as a principal) for the amount billed to the
customer for their time spent using the ‘‘1-900’’ number, or net (i.e., as an agent) for the
net amount retained by Landline?

3. What journal entries are necessary to appropriately account for each minute a customer
spends using PRU’s ‘‘1-900’’ number?

Note: After considering the case and reviewing the codification, you may find some gray area. You should be able to clearly explain the situation and facts, discuss any possible methods of accounting, and decide on which method you feel is most appropriate given the facts of this case. Your grade will depend on your understanding of the case and the relevant FASB codification just as much as your appropriate suggestion for how the company should account for the transactions.
FASB ACCOUNTNG STANDARDS CODIFICATION

On July 1, 2009, the Financial Accounting Standards Board (FASB) instituted a major change in the way accounting standards are organized. On that date, the FASB Accounting Standards Codification TM (FASB Codification) became the single source of authoritative, nongovernmental U.S. generally accepted accounting principles (U.S. GAAP). Now, only one level of authoritative U.S. GAAP exists, other than guidance issued by the Securities and Exchange Commission (SEC). All other literature will be non-authoritative.

As part of its educational mission, the Financial Accounting Foundation (FAF), the oversight and administrative body of the FASB, in a joint initiative with the American Accounting Association (AAA), is providing faculty and students in accounting programs at post-secondary academic institutions with the Professional View of the online FASB Codification.
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