Longeta Corporation Case Study

Longeta Corporation Case Study

Longeta Corporation is a software developer based in California selling products and support services directly to corporations and intermediaries. Intermediaries often resell Longeta software to government organizations. This paper contains responses to a Longeta Corporation Case Study concerning a recent sale to Magicon Incorporated. Longeta is planning a seven million dollar software sale to Magicon, and Magicon will resell to the United States Air Force.

2.

Longeta's fiscal year ends in September of 2006, so revenue earned by then would be recorded as current revenue for the fiscal year 2006. Since Longeta Corporation had entered into an order letter agreement with Magicon Incorporated, the revenue generated by the sales agreement is considered current revenue. Although the normal course of action would be drafting a reseller agreement prior to the sales commencing, an order letter meets GAAP obligations for revenue recognition. 1.2 million is recorded as deferred revenue because this amount constitutes service after the sale in the form updates and technical support after the software has been sold and installed. Deferred revenue would be recorded as a liability on the balance sheet.

3.

A letter was e-mailed and faxed to Magicon legal specialists in regards to the order letter from September 30th 2006 between Longeta Corporation and Magicon Inc. This letter confirms that Longeta corporation can recognize the revenue of the order as of September 30th as long as the two companies can come to an agreement within thirty days. If an agreement is not reached Longeta has agreed not to hold Magicon accountable for all obligations. This letter will only affect revenue recognition for Longeta if they cannot reach an agreement of terms and conditions within thirty days. In acceptance of the order letter Longeta has already recognized the revenue obligated in the letter.

4.

The letter from the vice president of sales should have been attached to the order letter submitted by magicon to Longeta. In the letter on September 30, 2006 Longeta's president of sales emailed and faxed a letter to Magicon stating "Per our discussion, the following is a clarification of the intent of the order letter dated September 30, 2006 between Longeta Corporation and Magicon Inc. The order letter meets GAAP requirement 97-4 for revenue recognition. The order letter allows Longeta to recognize revenue for our year ended September 30, 2006. The order letter gives us 30 days to reach mutually agreeable terms and conditions. In the unlikely event that Magicon will have the right to terminate the order letter and all obligations". Since the Vice president of Longeta had sent this letter through email and fax then the