Reference no: EM132904590

Problem 1: Walter, the CFO of Starlight Industries, stared at the framed photo of his wife and kids placed on the wall in front of his desk and pondered his future. Walter had just completed a discussion with his boss and company CEO, Bill McKinley, about the accounting treatment for a large sale just negotiated with Rockwall Entertainment. The deal with Rockwall included the construction of 5 amusement rides at two of Rockwall's properties and the total amount of the sale would result in Starlight achieving its current year forecast. Without the sale, Starlight would fall far short of the sales milestone. The construction of the amusements would not be completed during the current fiscal year, although based on a phased delivery schedule, 2 of the amusement rides would be completed and operational. The other three amusement rides will still be in various stages of production in the plant. Note that Starlight completely constructs amusement rides at their plant in Fairbanks Ohio, then disassembles the ride, kits it, then ships and reassembles on site at their client's parks. The value of the entire contract for the 5 amusement rides is $6.5 million. Walter and Bill just finished a heated discussion on the appropriate accounting treatment under generally accepted accounting principles. As an unusual part of the arrangement with Rockwall, the firm had prepaid the entire amount $6.5 million for the 5 amusement rides. A fact that Bill emphasized as he waived Rockwall's check in the front of him as he spoke. As a principled person with commitment to following GAAP, how should Walter account for the sale on the fiscal year-end financial statements.

Option 1: Since Rockwall has prepaid for the construction of the 5 amusements, the entire $6.5 million amount can be considered to be sales and reported as revenues on the year-end Income Statement

Option 2: Since all 5 of the amusements will have not been completed and the full contract is not satisfied, the $6.5 million should be booked as Deferred Revenues on the year-end Balance Sheet, then recognized as Sales when all 5 amusements are completed

Option 3: The sales revenues related specifically to the completed amusements can be booked as Sales and appear on the Income Statement, but the reminder of the $6.5 million should be shown as Deferred Revenues on the Balance Sheet

Option 4: The $6.5 million of the contract should be booked as Deferred Expenses until the time that the amusements are fully completed and operational

Option 5: The $6.5 million contractual amount for the 5 amusements can been shown as Sales on the Income Statement, but a Contingent Liability must be established for the unfinished amusements