Sullivan Should Recognize Revenue for the Two Parts of the Arrangement

question 17

Multiple Choice

Sullivan should recognize revenue for the two parts of the arrangement as follows:

• A)Recognize the entire $500 when the customer pays cash to buy the package.
• B)Recognize the portion of the $500 attributable to the software program when the customer pays cash to buy the package, defer the portion attributable to technical support and recognize over the support period.
• C)Defer the entire $500 and recognize over the support period.
• D)None of these.

Understand the relationship between the returns required by investors and the firm's cost of capital components.

Recognize the significance of market values in calculating the cost of capital over book values.

Know the concept of target capital structure and its relevance to the WACC.

Learn how the marginal cost of capital (MCC) and investment opportunity schedule (IOS) guide capital budgeting decisions.

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Definitions:

Hedge Cost

The expense associated with implementing a hedging strategy to minimize or manage financial risk.

Bushels

A unit of volume that is used in the United States for measuring agricultural commodities.

Swap Contract

A financial agreement where two parties exchange liabilities or cash flows from two different financial instruments.

Specified Cash Flows

Cash flows that are detailed or determined for specific activities, projects, or investments.