CASE 99-7, CLASS ACT   Term Paper ID:36499 Click to get this paper

Essay Subject: How should Class Act's revenue from an agreement with Broadway Venues be realized Recommends ...... More...

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Paper Abstract: Examines how Class Act's revenue from an agreement with Broadway Venues could be realized. Background of the situation. Alternatives. Recommends an accrual method of recognizing the revenue. Paper Introduction: Case Class Act Introduction Companies regularly enter into business agreements where payments aremade over a period of time Such agreements can take the form of leases where the payments are regular and made over a long-period of time or theymay reflect a shorter under one year time period where payments are madewhen certain conditions of a contract are met It is not unusual forexample for companies to issue payment when a contract is signed when acertain percentage of the contract is completed Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. This approach can be justified in thissituation since the period in question is under one year and since theagreement specifies the periodic payment of the revenue. A cash basis of accounting is much simpler to conduct and is based onwhat the company has actually received as opposed to what it might receivein the future. Onthe one hand, Broadway Venues will turn over 65 percent of ticket sales toClass Act as each performance takes place. In this way, theaccounts receivable account of Class Act would show a $2 million balance atthe end of February 1998 reflecting the additional money that is due toClass Act and also reflecting the fact that there is no reason to supposethat the money will not be forthcoming. An additional $2 million has been paid to Class Actby Broadway Venues as of February 1998. The question is howthat $5 million is to be realized from an accounting standpoint on the partof Class Act. This provides a more conservative picture of the company,but also prevents companies from overstating their financial position dueto poor risks. Season ticket holders are guaranteed seats at all of the performancesthat Broadway Venues may offer; in return, season ticket holders buytickets for productions that they might otherwise not purchase. Such agreements can take the form of leases,where the payments are regular and made over a long-period of time, or theymay reflect a shorter--under one year--time period where payments are madewhen certain conditions of a contract are met. This approachaccurately reflects the agreement between Class Act and Broadway Venues,and will provide appropriate information to anyone reading the financialstatements as a result. In that case, separate agreementshave to be worked out with each theater owner, and problems can arise if atheater operator fails to fulfill his end of the agreement. Thiseliminates many of the problems that can arise with tours where separateoperators are involved in each city. Class Act will use its gate revenuein whatever way it chooses, but presumably, these receipts will go towardoffsetting the costs of production in the various locations. On the other hand, the $5 million could also be recognized as it isreceived. Under the agreement, Class Act will put on "first-class" productionsof Pencil Pushers as a touring production at Broadway Venues theaters. Subsequentpayments will debit cash and credit accounts receivable. In the current situation, however, with a legal contractunderlying the expected revenue stream and with payments already received,there is little reason to expect that Broadway Venues will not continue topay the balance of the $5 million. All of this helpsexplain why Broadway Venues was willing to pay $5 million and give up 65percent of the ticket sales to Class Act. In addition, sincePencil Pushers is expected to be popular at each of the theaters where itwill be produced, theatergoers to those venues may purchase tickets toother productions even if they are not season ticket holders.Advertisements of upcoming productions through posters and in the programcan increase ticket sales to upcoming productions. Class Act, in the meantime, owns the rights to Pencil Pushers, butmakes no money from those rights unless it produces--or authorizes anothercompany to produce--the play. Accrual accounting provides a total picture of the moneythat is due Class Act including money that has not yet been paid. The two methods cited above each have their advantages anddisadvantages. Background Class Act owns the rights to the popular play, Pencil Pushers. ClassAct, as its name suggests, puts on fully rehearsed and directed productionsthat bring in full audiences, and Broadway Venues signed the agreement thatit did with Class Act in part to bring audiences into its theaters not onlyfor Pencil Pushers, but for other productions through the sale of seasontickets. Recommendation It is recommended that Class Act record the $5 million at the timethat the agreement was signed, with the $1 million payment debited to cashand the remaining $4 million debited to accounts receivable. The resultis that Broadway Venues increases the number of ticket holders for lesspopular productions since holding season tickets is one way to be assuredof seeing the Class Act production of Pencil Pushers. Alternatives The question that Class Act must resolve is how to recognize therevenue associated with the $5 million payment. The revenue could be recognized in one lump sum at the time that theagreement is signed. By mounting a touring production of Pencil Pushers in theUnited States, and signing with a single nationwide theater operator, ClassAct is able to generate interest in the play, and also guarantees that itwill have quality theaters available for the run of the tour. This method has the advantage of providing an accurate cash flow pictureof the company and does not overinflate the company's financial position byrecognizing revenue that has not yet been received. It is not unusual, forexample, for companies to issue payment when a contract is signed, when acertain percentage of the contract is completed, and at the finalacceptance of the contract. This would reflect an accrual method of accountingwhereby revenue is recorded at the time it is generated, not at the timethat it is actually received. The revenue associatedwith the ticket receipts will be recognized as it is received since thereis no way to anticipate accurately the receipts at each venue, or even onseparate nights at each venue. However, the fact that the $5 million is scheduled to be paid withinone year, the fact that some of the money has already been received, andthe fact that it is separate from the gate receipts raises questions abouthow it is to be realized. In this case, Class Act and Broadway Venueshave two payment schedules in place associated with the same contract. In addition,Broadway Venues will also pay $5 million to Class Act, with payment to becompleted within 12 months of the date that the agreement is signed.Periodic payments are to be made, with $1 million paid at the time theagreement was signed. That part of the agreement does not pose anaccounting difficulty. Case 99-7, Class Act Introduction Companies regularly enter into business agreements where payments aremade over a period of time. There is another sum, however,that of $5 million, which is what Broadway Venues is paying for theexclusive rights to the American touring production. A touring production of Pencil Pushers isone way to generate revenue from the rights, and Class Act has alreadydemonstrated that it can successfully mount touring productions with thethree other tours of Pencil Pushers that it already has touring in otherlocations. This would reflect a cash basis approach to accounting andreflects the actual revenue stream rather than the supposed revenue stream. If, for some reason,payments are not received at all, or if the repayment period extends beyondone year, this method of recognizing the revenue prevents Class Act fromexaggerating its financial position. Acompany's financial picture under the accrual method reflects that which isdue the company as well as that which the company has actually received.There is the possibility that some monies due the organization will not bepaid, but there are legal remedies to address those situations. Aspart of the agreement, Class Act will split the gate with Broadway Venueswith Class Act receiving 65 percent of the receipts and Broadway Venuesreceiving 35 percent of the receipts. It hasthree touring productions of Pencil Pushers currently playing in threeforeign countries and has received good notices for its productions. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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