Recommendation on How to Charge Unit Cost of Free HD DVR/DVD Recorder

You have requested that our firm provides Electronics R-Us company advice about whether the cost of each free product should be accounted as a reduction in revenue from the sales of the TV’s or as an increase in the cost of sales (cost of goods sold). Our recommendation is that the company should expense the $180 as a cost of sales. The cost cannot be accounted as lost revenue as according to (FASB, 2016, ASC para. 605-10-25-1), revenue can only be recognized when realized. Revenues and gains are however realized when products and services are exchanged for cash or claims of cash. Giving free DVD’s does not involve any cash exchange between the company and the customers. The only way to realize revenues is when the assets held can be easily converted into cash or cash equivalents (FASB, 2016, ASC para. 605-10-25-1). Revenues are also only recognized when earned. Revenue generating activities involve delivering products and rendering services and other acts that include significant business operations (FASB, 2016, ASC para. 605-10-25-1). The same paragraph also states that gains come from events that involve no earning process (FASB, 2016, ASC para. 605-10-25-1). Issuing the DVD’S will lead to earning some profit indirectly by increasing sales of the 40 inch TV’s, but it cannot be accounted as revenue realized by the firm from cash or cash benefits. If the increased profits from the increase in the sale of TV’s will be higher than the lost revenue of $119.9 on each free DVD, then Mr.

Justin Time cannot claim to have lost revenue. According to the (FASB, 2016, ASC para. 605-10-25-1), when it comes to gains, the realization is superior to earning.