Reference no: EM132971583

Etsy, Inc. is a two-sided online marketplace for unique and homemade goods. Through its website, Etsy.com, Etsy offers sellers a marketplace along with a range of seller tools and services that are specifically designed to help creative entrepreneurs generate more sales.

Etsy generates revenue from listing fees, transaction processing fees, and services revenue. In its 10-K for 2018, Etsy, Inc. disclosed the following information about its services revenue:

• Services revenue is derived from optional services offered to sellers, which primarily include advertising services and shipping labels.
• Etsy's on-site advertising service consists of cost-per-click fees an Etsy seller pays for prominent placement of her listings in search results in the Etsy.com marketplace. Cost-per-click fees are nonrefundable and are charged to a seller's Etsy bill when the ad is clicked.
• Revenue from shipping labels consists of fees an Etsy seller pays the Company when she purchases shipping labels through its platform, net of the cost the Company incurs in purchasing those shipping labels. The Company provides its sellers access to purchase shipping labels at discounted pricing due to the volume of purchases through its platform. The Company does not take control of shipping labels prior to transferring the labels to the Etsy seller.

Problem 1: Should Etsy recognize advertising revenue and revenue from shipping labels on a gross basis or on a net basis?

A. Etsy should recognize revenue related to advertising on a net basis after deducting the cost of revenue. Etsy should recognize shipping label revenue on a gross basis because it is acting as principal in the arrangement.

B. Etsy should recognize revenue related to advertising on a net basis after deducting the cost of revenue. Etsy should recognize shipping label revenue on a net basis because it is acting as agent in the arrangement.

C. Etsy should recognize revenue related to advertising on a gross basis with an offsetting expense recorded in cost of revenue. Etsy should recognize shipping label revenue on a net basis because it is acting as agent in the arrangement.

D. Etsy should recognize revenue related to advertising on a gross basis with an offsetting expense recorded in cost of revenue. Etsy should recognize shipping label revenue on a gross basis because it is acting as principal in the arrangement.