Question 1 (30 points)

The following excerpts are from Facebook, Inc ’s 10-K for the fiscal year ended December 31,

2020:

Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to our     customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We determine revenue recognition by applying the following steps:

• identification of the contract, or contracts, with a customer;

• identification of the performance obligations in the contract;

• determination of the transaction price;

• allocation of the transaction price to the performance obligations in the contract; and

• recognition of revenue when, or as, we satisfy a performance obligation.

Revenue excludes sales and usage‑based taxes where it has been determined that we are acting as a pass‑through agent

Advertising

Advertising revenue is generated by displaying ad products on Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications. Marketers pay for ad products either    directly or through their relationships with advertising agencies or resellers, based on the number of impressions delivered or the number of actions, such as clicks, taken by our users.

We recognize revenue from the display of impression-based ads in the contracted period in         which the impressions are delivered. Impressions are considered delivered when an ad is             displayed to users. We recognize revenue from the delivery of action-based ads in the period in  which a user takes the action the marketer contracted for. In general, we report advertising          revenue on a gross basis, since we control the advertising inventory before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory      before it is transferred to our customers. For revenue generated from arrangements that involve   third-party publishers, we evaluate whether we are the principal or the agent, and for those          advertising revenue arrangements where we are the agent, we recognize revenue on a net basis.

We may accept lower consideration than the amount promised per the contract for certain         revenue transactions and certain customers may receive cash-based incentives, credits, or         refunds, which are accounted for as variable consideration when estimating the amount of        revenue to recognize. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue. We believe that there will not be significant changes to our   estimates of variable consideration.

Other Revenue

Other revenue consists of revenue from the delivery of Facebook Reality Labs (FRL) consumer   hardware devices, net fees we receive from developers using our Payments infrastructure, as well as revenue from various other sources.

Deferred Revenue and Deposits

Deferred revenue mostly consists of billings and payments we receive from marketers in advance of revenue recognition as well as revenue not yet recognized for unspecified software upgrades    and updates for various FRL products. Deposits relate to unused balances held on behalf of our    users who primarily use these balances to make purchases in games on our platform. Once this    balance is utilized by a user, the majority of this amount would then be payable to the developer  and the balance would be recognized as revenue. The increase in the deferred revenue balance     for the year ended December 31, 2020 was driven by cash payments from customers in advance  of satisfying our performance obligations in FRL sales and advertising revenue, offset by              revenue recognized that was included in the deferred revenue balance at the beginning of the        period.

Our payment terms vary by the products or services offered. The term between billings and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

Required:

a.   Using terms and concepts we learned in class, explain what principal-agent contracts are and how Facebook recognizes them in their financial statements.

b.   In a few sentences, explain what are “deferred revenue”, how does Facebook record them in its  financial  statements,  and  what  accounts  are  affected  as  Facebook  performs  service obligations over time?

c.   On December 31, 2020, Facebook received $3,957 million cash advances from customers for future one-year ads on its platform. Show how Facebook would record the collection of these cash advances on December 31, 2020, and what accounting adjustment Facebook would record on March 31, 2021 (i.e., at the end of the first fiscal quarter of 2021), using journal entries, T- accounts, or the accounting equation method.

d.   On April 30 2020, Facebook signed a contract with a client to provide Facebook Reality Labs (FRL) products including hardware devices, and unspecified software updates for a two-year period for $20,000. All these two components are considered distinct performance obligations. In the absence of any promotional offer, Facebook sells the hardware for $18,700, and the software updates for $3000. Suppose the FRL was installed on June 1, 2020. Record the sale (of one unit) on June 1, 2020, according to the new revenue recognition standard. You may use journal entries, T-accounts, or the accounting equation method. Assume the customer pays in cash, and you do not need to recognize any cost of products sold for this question.

Question 2 (30 points)

Shown on the next page are the balance sheets for fiscal years 2018 and 2019 of Moderna, a      pharmaceutical and biotechnology company. Moderna focuses on drug discovery, drug             development, and vaccine technologies based exclusively on messenger RNA (mRNA). The     balance sheets are also available in electronic spreadsheet format on Canvas. The company’s    2019 financial report further includes the following information and all dollar figures below are in thousands, except per-share and share data.

•   The company’s property and equipment were disposed for cash at a loss of $316 during the year, with an original purchase cost of $1,070 and its associated depreciation of $327. That is, the carrying (net) value for this property and equipment was $743.

•   Depreciation of property and equipment for the year of 2019 was $455.

•   The company acquired new property and equipment for $20,716 in cash.

•   There were no acquisitions or disposals of intangible assets during the year. The change in intangible assets during the year is attributable to their amortization. To allocate their use  over time, tangible assets are depreciated, and intangible assets are amortized.

•   The company gave stock-based compensation of $81,122 to its employees. Stock-based compensation is a non-cash expense and is credited to (i.e., increases) additional paid-in capital.

•   The company’s income statement shows a net loss of $514,021.

•   All short-term and long-term investments were purchased for cash at their balance sheet value. No short-term or long-term investments were sold during the year.

•   The company issued additional shares of common stock for cash.

•   All transactions in items involving taxes and ‘other’ assets and liabilities are operating activities.

Required:

Prepare a cash flow statement for the year ended December 31, 2019, by the indirect method.

Question 3 (20 points)

The Tax Cuts and Jobs Act of 2017 reduced the statutory tax rate applicable to corporations in the US from 35% to 21%, effective on January 2018.  For the sake of this question, assume the Act did not introduce any other changes.

Recall, the balance of deferred tax assets (DTAs) or deferred tax labilities (DTLs) on a      company’s balance sheet represents the temporary differences in the tax bases between the company’s financial accounts and its IRS accounts multiplied by a relevant tax rate. These differences reverse in the future.

When the temporary differences reverse, future tax rates apply. Therefore, the balance of a       deferred tax liability or asset is adjusted if thefuture tax rate, at the time the related difference will reverse, is different from the initial tax rate at which the deferred tax item was created.    Adjustments to the deferred tax asset/liability are reflected in the income tax expense in the    period of the change (i.e., as soon as changes to tax rates are announced).

In its 2017 Annual Report, GM provides the following income tax disclosures:

Years Ended December 31

2017 2016 2015

Income before income taxes 11,863       12,008        8,371

Required:

a.   Record the income tax expense for GM in 2017.

b.   Calculate GM’s effective tax rates for 2016 and 2017.

c.   Did GM’s net deferred tax position (DTA – DTL) increase or decrease in 2017? By how much?

d.   In  2016,  GM  had  a  deferred  tax  asset  of  $8,074  related  to  warranties  and  discounts (“Warranties, dealer and customer allowances, claims and discounts”) because the IRS only recognizes the related expense for tax purposes when they are incurred (cash is spent). What would the value of this DTA be in 2017, assuming the entire change in this DTA is due to the tax rate cut.

e.   How will the tax rate cut affect GM’s net income in the future? By contrast, what was the immediate impact of the reform on GM’s net income in 2017 (assuming the entire change in the net deferred tax position recorded in (a) is due to the future tax rate change)?

Question 4 (20 points)

The following information is taken from the 2019 financial report of Synopsys, INC., an electronic design automation company that focuses on silicon design and verification, silicon intellectual property and software security and quality.

The following table represents the components of accounts receivable, net:

October 31,

2019

2018

(in thousands)

Unbilled accounts receivable

38,175

64,067

Total accounts receivable

Less allowance for doubtful accounts

The following table presents the changes in the allowance for doubtful accounts:

Balance at

Beginning

of Period

Write-offs

(1)

(in thousands)

Balance at End of

2018    $                         5,165    $ $                   (2,920)       $                         5,613

2017    $                         3,201    $                        2,149    $ $                         5,165

(1) Balances written off, net of recoveries

Clarifying information

1.   Assume no recoveries when no information about them is provided.

2.   Consider unbilled accounts receivables a part of total accounts receivables and include them in your calculations.

Required:

a.   What percent of Gross Accounts Receivable does the Allowance for Doubtful Accounts represent as of October 31, 2019? Did that percentage increase or decrease in 2019 relative to 2018?