Document your final conclusion about the accounting treatment of this transaction between Longeta and Magicon. Be sure to provide a basis for your conclusion.

What will be an ideal response?


Longeta’s recording of this sales transaction violated GAAP related to revenue recognition. First, neither Longeta nor Magicon had reached agreement on the terms and conditions of the sale. Thus, no evidence of an arrangement for the transaction exists. Second, the separate agreement gives Magicon
full right of return. Thus, no exchange of assets has taken place, given that Magicon has no commitment
to provide Longeta anything. Third, the separate agreement notes that if no terms can be finalized,
Magicon has no obligation to pay Longeta. Thus, no collection would be expected in that event. As a
result, both the recording of the $5.8 million in revenue and the $1.2 million in deferred revenue are
not in accordance with GAAP.

Business

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