Bo Broker Company Case Study

Bo Broker Company has entered into a contractual agreement with the Acme Construction Company and the First Bank Company. In this contract, they have set terms on how and when Bo Broker Company receives its payments. All of the parties involved come to an agreement that Bo Broker Company will receive the fee once the Acme Construction Company and the First Bank Company have arrived at an agreement about the terms of the construction mortgage. Bo Broker Company facilitates the transaction and there are four scenarios under which Bo Broker Company receives documents guaranteeing its payment.

The first scenario is that Bo Broker Company will accept a non-interest bearing or unsecured negotiable note that is payable over the life of the related

5 Recognition and Measurement in Financial Statements of Business Enterprises, revenue should not be recognized until they are realized or realizable (FASB, 1984). In other words, when revenues are recognized if they are realizable is when the stated assets have need received or they are readily held convertible to known figures. It is also stated that revenue can be recognized when it is earned. Accounting Standards Codification 606-10-25-1 states that an entity shall account for a contract with a customer that is within the scope of: the parties to the contract approving the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations, the entity can identify each party’s rights regarding the goods or services to be transferred, the entity can identify the payment terms for the goods or services to be transferred, the contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract), and it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer (FASB,

According to the Accounting Principles Board, the total amount to be recognized for the entire period is measured by the difference between the actual amount of cash received by the borrower and the total amount agreed upon to be repaid to the lender (1971). This would require such amount to be recognized as the difference between the present value of the receivable and cash loaned regarded as the addition cost to the products during the contract term. Such a non-interest note may be partial consideration under a purchase contract for supplier products at lower prices than the current prevailing market prices (APB, 1971). The note discount shall be required to be amortized over the life of the note. TIS Section 5100.14 states that income is recognized once the services have been performed and billed, which may be prior to the receipt of the negotiable note (AICPA). Under the second scenario, Bo Broker Company will accept a non-negotiable note whose eligibility for payment also runs for the period of the mortgage. Non-negotiable notes are treated the same as the negotiable notes. This means that the revenue recognition is similar.

Under the third scenario, Bo Broker Company will accept a commitment letter in which the receiver doesn’t get paid upon construction draws. Section 5100.14 provides further information