Summary Business Accounting

Question:

AuctionCo.com sells used products collected from different suppliers. Assume a customer ordered a used

bicycle through AuctionCo.com for $30. The cost of this bicycle is $20 to AuctionCo.com. The bicycle

will be shipped to the customer by the original bicycle owner.

Required:

1. Assume AuctionCo.com takes control of this used bicycle before sale. Under this assumption, how

much revenue would the company recognize?

2. Assume AuctionCo.com never takes control of this used bicycle before sale. Under this assumption,

how much revenue would the company recognize?

3. Which assumption do you think is more appropriate for the AuctionCo.com case? Explain.



Answer:



When other parties are involved in providing goods or services to a seller’s customer, the seller has to

determine whether its performance obligation is to provide the goods or services itself, making the seller a

principal, or the seller arranges for another party to provide those goods or services, making the seller an

agent. That determination affects whether the seller recognizes revenue in the amount of consideration

received in exchange for those goods or services (if principal) or in the amount of any fee or commission

received in exchange for arranging for the other party to provide the goods or services (if agent).



Requirement 1

AuctionCo is a principal because it obtained control of the used bicycle before the bicycle was sold.

Therefore, AuctionCo should recognize revenue of $30.