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2. How should the company recognize revenue based upon the two possible FOB contract structures mentioned in the case? Why?
FOB shipping point – Biovail’s contract with the distributor had title change in Manitoba when it left the shipping dock. (Byer takes responsibility for the goods when the goods leave the seller’s premises)
FOB destination – The agreement between Biovail and the Distributor provided that title too, and the risk of loss with respect to the product would not have passed to the Distributor until the product was delivered to the Distributor’s facility. (Sellers remain responsible for the goods until the buyer takes possession)
To recognize revenue in accordance with US GAAP, it has to meet below criteria. 1. Persuasive evidence of an arrangement exists 2. Delivery has occurred or services have been rendered 3. The seller’s price to the buyer is fixed or determinable 4. Collectability is reasonably assured
Reading through the case, we can find and assume that 1, 3, and 4 meet the US GAAP criteria. There must be a sales agreement in order to deliver the product and must indicate the price on the contract. Since the distributor is a major international pharmaceutical company collectability is also assured. But criteria 2 must to be analyzed.
For FOB destination, the revenue should not be recognized in the third quarter. Based on this statement that “the company confirmed that the manufacturing cost value of this shipment had been fully insured.” The beneficiary of the insurance must be Biovail, which means that the title had not been passed to the distributor. Since it doesn’t meet the criteria 2, the revenue should not be recognized until October.
For FOB shopping point, the title of the goods has been transferred to the buyer and so the shipment has been “delivered” after leaving Bioval shipping dock. According to this

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