Summary Business Accounting

Question:

Assume that Amazon.com sells the MacBook Pro, a computer brand produced by Apple. Amazon

arranges its operations such that customers receive products from Apple Stores rather than Amazon.

Customers purchase from Amazon using credit cards, and Amazon forwards cash to Apple less a fixed

commission that Amazon keeps above the normal wholesale MacBook Pro price. In this arrangement, is

Amazon a principal or an agent?

Why? Given that answer, would Amazon recognize revenue for the entire sales price of the MacBook Pro

or only the amount of the commission received in exchange for arranging sales for Apple Stores?



Answer:



Indicators that the seller is a principal (recognizing gross revenue) as opposed to an agent (recognizing

net revenue) include the following:

 The company is primarily responsible for providing the product or service to the customer.

 The company has general inventory risk, meaning that the company owns inventory prior to a

customer ordering it and after a customer returns it.

 The company has discretion in setting prices and identifying suppliers.

In this transaction, Amazon never bears inventory risk, and is paid a fixed commission such that it has no

discretion in setting prices. Therefore, Amazon appears to be an agent, and would only recognize revenue

on the transaction equal to the amount of the commission it receives.