Question 1 (40 points)

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

2019:

General

We seek to be Earth’s most customer-centric company. We are guided by four principles: customer obsession  rather  than  competitor  focus,  passion  for  invention,  commitment  to  operational excellence, and long-term thinking. In each of our segments, we serve our primary customer sets, consisting of consumers, sellers, developers, enterprises, and content creators. In addition, we provide services, such as advertising to sellers, vendors, publishers, and authors, through programs such as sponsored ads, display, and video advertising.

Consumers

We serve consumers through our online and physical stores and focus on selection, price, and convenience. We design our stores to enable hundreds of millions of unique products to be sold by us and by third parties across dozens of product categories. Customers access our offerings through our websites, mobile apps, Alexa, devices, streaming, and physically visiting our stores. We also manufacture and sell electronic devices, including Kindle, Fire tablet, Fire TV, Echo, Ring, and other devices, and we develop and produce media content. We seek to offer our customers low prices, fast and free delivery, easy-to-use functionality, and timely customer service. In addition, we offer Amazon Prime, a membership program that includes unlimited free shipping on over 100 million items, access to unlimited streaming of tens of thousands of movies and TV episodes, including Amazon Original content, and other benefits.

Revenue

Revenue is measured based on the amount of consideration that we expect to receive, reduced by estimates for return allowances, promotional discounts, and rebates. Revenue also excludes any amounts collected on behalf of third parties, including sales and indirect taxes. In arrangements where  we  have  multiple performance  obligations,  the  transaction price  is  allocated  to  each performance obligation using the relative stand-alone selling price. We generally determine stand- alone selling prices based on the prices charged to customers or using expected cost plus a margin.

A description of our principal revenue generating activities is as follows:

Retail sales - We offer consumer products through our online and physical stores. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon our delivery to a third-party carrier or, in the case of an Amazon delivery, to the customer.

Third-party seller services - We offer programs that enable sellers to sell their products in our stores, and fulfill orders through us. We are not the seller of record in these transactions. The commissions and any related fulfillment and shipping fees we earn from these arrangements are recognized when the services are rendered, which generally occurs upon delivery of the related products to a third-party carrier or, in the case of an Amazon delivery, to the customer.

Subscription services - Our subscription sales include fees associated with Amazon Prime memberships and access to content including audiobooks, digital video, digital music, e-books, and other non-AWS subscription services. Prime memberships provide our customers with access to an evolving suite of benefits that represent a single stand-ready obligation. Subscriptions are

paid for at the time of or in advance of delivering the services. Revenue from such arrangements is recognized over the subscription period.

AWS - Our AWS arrangements include global sales of compute, storage, database, and other services. Revenue is allocated to services using stand-alone selling prices and is primarily recognized when the customer uses these services, based on the quantity of services rendered, such as compute or storage capacity delivered on-demand. Certain services, including compute and database, are also offered as a fixed quantity over a specified term, for which revenue is recognized ratably.  Sales  commissions  we  pay  in  connection  with  contracts  that  exceed  one  year  are capitalized and amortized over the contract term.

Other -  Other  revenue  primarily  includes  sales  of  advertising  services,  which  are recognized as ads are delivered based on the number of clicks or impressions.

Return Allowances

Return allowances, which reduce revenue and cost of sales, are estimated using historical           experience. Liabilities for return allowances are included in “Accrued expenses and other” and  were $468 million, $623 million, and $712 million as of December 31, 2017, 2018, and 2019.    Additions to the allowance were $1.8 billion, $2.3 billion, and $2.5 billion and deductions from the allowance were $1.9 billion, $2.3 billion, and $2.5 billion in 2017, 2018, and 2019. Included in “Inventories” on our consolidated balance sheets are assets totaling $406 million, $519           million, and $629 million as of December 31, 2017, 2018, and 2019, for the rights to recover     products from customers associated with our liabilities for return allowances.

Unearned Revenue

Unearned revenue is recorded when payments are received or due in advance of performing our  service obligations and is recognized over the service period. Unearned revenue primarily relates to prepayments of AWS services and Amazon Prime memberships. Our total unearned revenue  as of December 31, 2018 was $7.9 billion, of which $6.3 billion was recognized as revenue         during the year ended December 31, 2019 and our total unearned revenue as of December 31,     2019 was $10.2 billion. Included in “Other long-term liabilities” on our consolidated balance      sheets was $1.4 billion and $2.0 billion of unearned revenue as of December 31, 2018 and 2019.

Segment Information

Net sales by groups of similar products and services, which also have similar economic characteristics, is as follows (in millions):

Year Ended December 31,

2018

Net Sales:

122,987

17,224

42,745

14,168

25,655

10,108

Consolidated

232,887

Required:

a.   Using terms and concepts we learned in class, explain how Amazon recognizes revenues from Retail sales, Third-party seller services, and Subscription services.

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

c.   On  December  31,  2019,  Amazon  received  $1,456  million  in  one-year  Amazon  Prime membership fees from customers. Show how Amazon would record the collection of these membership fees on December 31, 2019, and what accounting adjustment Amazon would record on March 31, 2020 (i.e., at the end of the first fiscal quarter of 2020), using journal entries, T-accounts, or the accounting equation method.

d.   On January  1, 2020, Amazon launched a new “laptop” in collaboration with Lenovo. To promote this new product, Amazon offers this laptop with the Amazon Echo smart speakers (Alexa), a free one-year warranty, and a free six-months Amazon Prime membership for $2,000. All these four components are considered distinct performance obligations. In the absence of any promotional offer, Amazon sells the new laptop for $2,200, the speaker for $100, the one-year warranty for $200, and the monthly Prime membership for $10. Record the sale (of one unit) of the new bundle on January  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 Amazon purchased the laptop for $1500 and the speaker for $60 from suppliers in the previous fiscal year.

Question 2 (20 points)

The next two pages show excerpts from the 2019 financial report of Isoray, a producer of          radioactive chemical isotopes used in cancer treatments. Based in Richland, WA, Isoray sources its raw materials mainly from nuclear reactors in Russia and sells its products to medical            facilities throughout the United States. The following questions relate to the company’s fixed    assets. Note that Isoray’s fiscal year ends on June 30.

Required:

a.   What is the net book value of depreciable property and equipment (not the net book value of all property and equipment) as of June 30, 2019?

b.   Calculate the total gross property and equipment and accumulated depreciation balances as of June 30, 2017. No assets were retired (sold) in fiscal year 2018.

c.   Record the disposal of property and equipment in 2019.