Items to Address
1. How has the economics of HMM’s business model changed from HMM11 to HMM12? Why
should that influence how revenues are recognized? Use and cite credible sources to explain.
2. Consider the example on page 4 of the case, the last paragraph under the Section “Revenue
Recognition for HMM”. This shows how you would account for the initial contract date and then
the first quarter of that contract. How would you account for each quarter of a contract for
HMM11 products? How would you account for each quarter of a contract for HMM12 products?
Include what accounts these different situations affect, the type of account they are (ex. Asset),
on what financial statements each of those accounts belong, and what impact it has to the
bottom line of those financial statements. Show the impact on the accounting equation for both
scenarios. Is there a point where the accounting impact is the same in both cases? If so, when
and why?
3. How and why does the revenue recognition create a liability on HBP’s financial statements?
4. What concerns or perceptions might the employees and shareholder have as a result of the
financial statement effects of the change in revenue recognition for HMM12?
5. Given the changes in strategy and accounting, how should the company reward its sales force
for selling the new version of the product? How would you recommend they account for the
pay?
6. In addition to the above revenue recognition issues about HBP, I have another company I need
to know when to recognize revenue, liabilities, cash, etc. Present this as clearly as you did for
HBP for each month during 2023.
a. Andy’s Lawn Service
i. In January 2023, Andy mowed five lawns and billed the customers $50 each with
a February 2023 payment due date. He also received three contracts in January
2023 from businesses wanting him to mow from January to December of that
same year. Each company paid the total annual payment of 1,200 in January
2023.
Your audience
The report should be written to an executive who does not understand the details of revenue recognition and the differences between these products and the other company for which he is responsible. So, you will have to provide explanations as presented above.
