Case 14 Mesmerizing Marketers
Mesmerizing Marketers (MM) is a marketing company that offers a variety of marketing
offerings to its customers. Specifically: o MM will create a TV commercial for $1M, build an app for $500K, and build a Facebook
page for $250K. These amounts represent MM’s charges for these items when MM sells
them separately to customers. The TV commercial, the app, and the Facebook page are
not interrelated; that is, each functions independently of the other offerings. . If all aforementioned items together, the total cost is Sl.5M.
Payment terms are 50 percent consideration due at contract signing, with the remaining
50 percent due over the rest of the development period (25 percent at mid-point, 25
a customer purchases percent at completion). o If the app is downloaded 500K times or more in the first month, there is a one-time bonus
of $250K payable to MM. Stone, a customer, approaches MM with the hopes of reinventing its image to a younger
customer base. Stone has a verbal agreement with MM that is based on MM’s unsigned quote to
Stone on November 30, 20X5, for one TV commercial, one app, and a Facebook page. The
agreement creates enforceable rights and obligations pursuant to MM’s customary business
practices. None of these items can be redirected by MM to another customer. MM performed a
credit check on Stone and has determined that Stone has the intention and ability to pay MM for
fulfilling its portion of the contract. Stone is required to pay MM for performance completed to
date if Stone cancels the contract with MM for reasons otherthan MM’s failure to perform under the contract as promised.
q Stone makes a payment on November 30, 20X5, in the amount of $750K pursuant to the
agreement. From the date of the quote, it takes MM six months to develop and produce the TV
commercial, two weeks to complete the Facebook page, and three months to complete a fully
functioning app. MM does not think that the app will be downloaded 500K times in the first
month because Stone’s customer base does not quickly accept newly developed technology. On
the basis of its experience with similar technology, MM has determined that it takes over three months for Stone’s users to begin to download its apps. Required MM’s CFO is trying to understand the new revenue recognition model that is effective for the
company in 2019 and has asked you to explain how MM would account for the above scenario
under the new standard.
recognition model? Copyright 2016 Deloitte Development LLC
All Rights Reserved. Case l4: Mesmerizing Marketers
month? b. MM believed at the outset that there is about a 75 percent chance that the app will
be downloaded more than 500K times and it is probable that there will not be a
signifi cant reversal of revenue? Copyright 2016 Deloitte Development LLC All Rights Reserved.