Mad Men, Inc. (“Mad Men”) is an that assists its customers in . Mad Men’s fiscal year ends on December 31st.
JonHamm, Inc. (“JHI”) entered into a with Mad Men on to develop one TV commercial, one cellphone application, and a Facebook page for a total price of $1,500,000, which represents a off the of these products (i.e., if purchased separately, customers would pay $1,000,000 for the TV commercial, $500,000 for the cellphone application, and $250,000 for the Facebook page). These products are JHI-specific, meaning that the The TV commercial, cellphone application, and the Facebook page are ; that is, each functions . In addition, the agreement specifies that if the cellphone application is downloaded 500,000 times or more in following delivery to JHI, there is a $250,000 payable to Mad Men.
Payment terms are , 25% due at mid-point of the development process, and 25% due at completion. The agreement creates enforceable rights and obligations pursuant to Mad Men’s customary business practices. Mad Men has a long-standing business relationship with JHI and believes that JHI has the ability and intention to pay Mad Men for fulfilling its performance obligations under the agreement. JHI is required to pay Mad Men for work completed to date if JHI cancels the contract for reasons other than Mad Men’s failure to perform under the contract as promised.
JHI pays $750,000 to Mad Men on December 30, 2017 but does not sign the contract until January 2, 2018. Mad Men expects it will take six month to produce the TV commercial, two weeks to complete the Facebook page, and three months to complete the cell phone application. Mad Men believes there is a 60% chance that the cellphone application will be downloaded 500,000 times or more in the first post-delivery month, and a 40% chance that downloads in that month will be less than 500,000.
1. How should Mad Men account for this transaction under ASC 606? Please provide enough detail so that Mad Men’s revenue accountant will know exactly how to recognize the contract revenue and when to recognize that revenue.