Essay on Accounting - Crazy Computers and Three Little Pigs
Crazy Computers Retailers is wrong in recognizing the insurance premium commission it receives after selling these policies to consumers as revenue. Provisions of ASC 605 – 45 on revenue recognition provides that an entity is a principal transaction and should be reported as gross on condition that the party recording is the primary obligator (Miller, 2013). This means that it is liable to the customer in case of a claim covered by the insurance policy accorded to the consumer. However, Crazy Computers Retailers does not offer primary obligation and thus should not recognize the initial commission collected from premium policies as gross revenue. The Third Party Insurer is the one responsible of settling the claim and thus …show more content…
Three Little Pigs, Inc.
Evaluating Inventory Impairment
To evaluate whether there is impairment in the inventory, the Three Little Pigs, Inc. should use one or more of these methods. First, the Three Little Pigs, Inc. can use the total inventory basis of evaluating the level of inventory impairment. This alternative can be used on condition that the company feels that the total inventory will be adversely affected. From the case study, it is clear that the total inventory will be affected should the company engage in sale of its hogs to a third party player. In this case, the Three Little Pigs, Inc. can choose a conservative approach, which is safer for the inventory to ensure that the company does not make huge losses. A quick preview of the returns from sale of these hogs in October 2002 would lead to a loss of $ 2/ cwt, which is the age of maturity of these hogs. This loss is bound to affect the total inventory since the company will be making losses rather than making profits. If the hogs cost $ 31/ cwt, then the price for each should exceed the cost incurred in developing the hogs. More importantly, the Three Little Pigs, Inc. should be in a position to make profits from this investment and thus it should sell its hogs for at least $ 32/ cwt. Similarly, the company should detest selling the hogs at $ 30 since this