1 ACC 305 Research and Writing Assignment #2 Revenue .docx

1
ACC 305 Research and Writing Assignment #2: Revenue
Recognition
Due Date: Thursday, November 9 at 3:00 pm
Soft Copy: Upload your file to Isidore; Hard Copy: Bring one
printed copy to MH 405
Assignment Goals:
- Obtain research experience in the Accounting Standards
Codification
- Obtain experience using SEC filings and the SEC website
- Practice writing concise accounting-related deliverables
Points: 10 points - The memo will be graded for content,
research, and writing. See the below
information for expectations. Late submissions that arrive
during class or within 2 hours of the
due date and time will receive a 10% penalty. Submissions after
this time will not be accepted.

Note: You may complete the assignment on your own or with
one other person in the course. If
you complete the assignment with a classmate, you must turn in
one, joint assignment.
Assignment Description:
Scenario:
After graduating from the University of Dayton, you joined the
accounting staff of Potbelly
Corporation (the Company). Your supervisor has asked you to
evaluate specific questions about
the application of soon-to-be-implemented Topic 606. To
address these questions, your
supervisor has asked you to perform research in the FASB’s
Accounting Standards Codification
and write a research memo.
Tip: Before you get started, review memo examples on Isidore,
as well as Appendix 1. They will
provide you with a sense of the appropriate tone and detail to
include in a research memo.
Memo Format:

-up should be no more than 3 pages in
length
-spaced
ne-inch on all sides
not counted as a page.
-text reference to the ASC is generally in
the following format: XXX-XX-
XX-XX. The first time you reference a topic and subtopic
(XXX-XX) in your memorandum,
it is helpful to use words to describe the topic and subtopic. For
example, one of your sample
memos states “ASC 605–45 (Revenue Recognition—Principal
Agent Considerations)”.
2

your textbook is not an
appropriate source to cite in this assignment. References should
be to the Accounting
Standards Codification.
8 Step to Approach an Accounting Research and Memo
Writing?1
Step 1:
Understand the facts/background of the transaction(s).
The below resources provide appropriate information for the
memo background AND provide
appropriate information for background on the research issues.
Where appropriate, use these
resources to understand the company and the background for
each issue. (Tip: You might want to
glance through Step 2 before reading so that you know what the
issues are.)
Resources for understanding the facts/background:
Perform the following to develop an understanding of Potbelly’s
business and its revenue
streams:

-K -
search to find the December 25,
2016 10-K for Potbelly Corporation (Ticker symbol: PBPB).
Recall that a 10-K is filed
weeks to months after year end so a filing date is later than a
year-end date.
o Read the first few pages of Item 1. Business of Potbelly in the
10-K to obtain
background on the Company’s business. Your understanding of
the company’s
business is necessary to discuss the below issues. I have not
provided all of the details
in the prompt, as I would like for you to navigate the 10-K.
Give particular attention
to Page 10 of Item 1 – Franchising, which describes the services
provided to
franchisees.
o Read Part (q) Revenue Recognition of Note (2) Summary of
Significant Accounting
Policies to understand Potbelly’s current revenue streams and
recognition policies
prior to implementation of Topic 606. (Note: Revenue
recognition after the
implementation of Topic 606 might be similar or different than

the description
currently provided by the Company.)
- Understand the
Company’s franchise royalties and fees
by performing the following
o Watch a short Investopedia video if you are unfamiliar with
the franchise concept:
http://www.investopedia.com/video/play/franchise/
o Obtain information on the dollar amount of a typical
investment (franchise fee) paid
by a franchisee to the Company (the franchisor or Potbelly
Franchising LLC)
(https://www.potbelly.com/franchising/investment)
o Watch a short Investopedia video if you are unfamiliar with
the royalty concept:
http://www.investopedia.com/terms/r/royalty.asp
1 Steps are primarily from Guide to Intermediate Accounting
Research by Shelby Collins.
http://www.sec.gov/
http://www.investopedia.com/video/play/franchise/
https://www.potbelly.com/franchising/investment
http://www.investopedia.com/terms/r/royalty.asp

3
o Obtain information on the typical calculation of royalty fees
paid by a franchisee to
the Company (https://www.potbelly.com/franchising/faq)
y Perks - Understand Potbelly Perks, a customer
engagement or loyalty program
launched in 2017: https://www.potbelly.com/perks
– Read a short Investopedia definition on
gift card breakage:
http://www.investopedia.com/terms/b/breakage.asp
Note: It is not acceptable to copy and paste language from the
above sources. Use your own
language.
Step 2: Define the problem. That is, identify the “researchable
question”.
As you are new to accounting research, I will give you the
questions to research, but Professor
Stover likely will not provide you with questions since that is
more “real world”. Even though I

am giving you the questions, you do need to make sure you
spend time on Step 1. You cannot
appropriately answer the questions without understanding the
company’s business or the fact
pattern. In other words, do not skip over steps. Following the
steps really does help! In this
assignment, your supervisor has instructed you to consider the
following questions:
ssue #1: Does the Company have more than one performance
obligation to the
franchisee in return for the franchise fee it receives at the
beginning of the franchise
contract?
Perks create a
performance obligation at the time that customers earn points
towards future rewards?
How does this impact the allocation of the transaction price, if
at all?
card breakage?
Step 3: Stop and think: Based on what you know from class (and
your general intuition
from the conceptual framework), what accounting treatment will

likely be appropriate?
You do not need to include this step explicitly in your memo,
but it helps with the next step.
Often, the item you are researching might be familiar to you,
but you are uncertain about the
precise answer. Using what you know to focus your search can
be incredibly helpful. Your
textbook and EY’s Technical Line can be helpful to you, but
keep in mind that neither can be
used to support your conclusions.
Step 4: Search potentially relevant sources of guidance, copying
any relevant guidance into
a Word document
For this class, you will use the Accounting Standards
Codification for research. The ASC is
available at http://aaahq.org/ascLogin.cfm. (User ID:
AAA51174 and Password: N34FxPJ). You
might not use all research that you find, but copying any
possible relevant guidance into a Word
document will help you to keep track of what you do find. Make
sure you include the location of
https://www.potbelly.com/franchising/faq
https://www.potbelly.com/perks
http://www.investopedia.com/terms/b/breakage.asp

http://aaahq.org/ascLogin.cfm
4
the guidance in your working document. It will help with
writing your final memo. Here are
some considerations for your search:
most relevant
codification uses a term you do
not know, make sure you dig in by following any references to
other parts of the ASC or
going to the ASC glossary to understand the definition of the
term and whether it applies
to your setting.
weed out sources
that appear less relevant
Please keep in mind that your textbook and EY’s Technical Line
are not citable sources for a
research assignment. You may use them to help you with Step 3,
but you cannot use them or
resources not mentioned in this document to support your

conclusions.
Step 5: Analyze any alternatives you have identified,
considering the applicability of each
one.
This step is not explicitly in your memo. However, try to keep
track of your thought process as
you are weighing your alternatives. You will use that thought
process in the next step.
Step 6: Determine which accounting treatment is most
appropriate and document your
conclusion
After completing the first five steps, summarize your conclusion
for each issue using two or
three sentences. Place your conclusion for each issue into the
Conclusion sections of the memo.
Step 7: Justify and explain your conclusion
Step 7 focuses on writing. Break down the writing of the memo
into separate parts. You do not
need to repeat information in the backgrounds. If it is
mentioned once, you may assume that the
reader remembers it. Assume that the reader does not have

access to the Potbelly website so you
need to explain Potbelly’s fact pattern in your memo.
Background and Facts of Memo: Summarize pertinent company
background and state the
purpose of your memo in “Background and Facts”. See
Appendix 1 and examples on Isidore for
suggestions. You do not need to dive into details here. Pertinent
details can be provided in the
Background for specific issues. Finish this section by stating
the purpose of the memorandum.
Background for Each Issue: Summarize important information
for the reader of your memo in
the “Background” for Issue 1 (and then Issue 2). Act as if the
reader knows nothing about the
situation. Any key facts pertinent to your ultimate issue
conclusion need to be provided by you in
the background for the issue.
5
Research and Analysis for Each Issue: This section is the most
challenging section of the

memo to write. Carefully review the examples on Isidore and
the tips in Appendix 1. In this
Section, consider the following:
support the reasons for your
conclusion.
you considered when arriving
at your conclusion. Make sure you link these factors back to
specific research that you
found.
can understand why/how you
arrived at your conclusion.
Please keep in mind that this is not a homework problem where
you are evaluated on copying
and pasting the “right” research into the memo. Instead, this is a
research and writing assignment
where you are evaluated on your ability to identify appropriate
research, interpret the research
for the reader, and link that research back to your specific
company situation to arrive at your
conclusions.

Step 8: Review your memorandum for appropriate content and
writing
Items to Consider as You Self-Review Your Content
Your memorandum should be written in a manner that enables a
person who is not involved with
the issue to understand the issue background, relevant research,
and your interpretation of the
research.
be able to understand
background on the company and the issues? In other words, are
you providing the
appropriate company background to allow someone to
understand the issues in the context of
the company?
the question(s) being asked?
be able to understand what you
found in the codification? Tip: You are encouraged to include
well-cited quotes from the
codification.

research you are citing be able to
understand how you arrived at your conclusions? In other
words, does your analysis (i.e.,
your discussion) illustrate how your research applies to the
specific company facts? Tip: Do
not make the reader “work” or require the reader to re-interpret
the research. Interpret how
the research applies to the specific circumstances for the reader.
conclusions that you provided?
6
Items to Consider as You Self-Review Your Writing
Your write-up should be clear, concise, complete, free of
spelling and grammatical errors, and
professional looking.
the same font type and size

throughout? Do you avoid “orphan” headings or subheadings?
Have you removed the
“Appendix 1” heading from the memo template? Is a large quote
from the codification
appropriately indented (see sample memorandums)?
purpose of the memo (e.g., no
contractions, no casual phrases, avoid use of “I” or “we”, avoid
use of strong or
inflammatory words)?
a “they” (incorrect)?
“their”/“there” and other words that are often
confused correctly?
o
not require large words or
complex phrases.)
In addition, you may use writing support from the Knowledge
Hub for this assignment. In
the Knowledge Hub, all UD students can receive free research

and writing assistance on any
assignment, at any stage of the writing process.
Expectations for Writing and Research Assignment:
Acceptable Resources
assignment. You do not need to cite
the 10-K or sources mentioned above, but you do need to cite
the Accounting Standards
Codification in the text (e.g., ASC XXX-XX-XX-XX).
classmate. You may not share
your memo or your answers with other students. Using
resources other than your textbook
and those resources mentioned in this assignment (e.g.,
classmates, parents, CPA friends,
other students’ prior course memos, assignments or resources
that you find online) is a
violation of the Honor Code. See the syllabus and Honor Code
to understand implications of
completing the assignment using unauthorized assistance.
Academic Honesty:
Here is some advice to help you avoid plagiarizing:

It is best to express the ideas you use in your own words. In the
case of both individual and
group work, words or ideas that come from someplace or
someone else must be cited: “A good
rule of thumb is this: Whenever you consciously borrow any
important element from someone
else, any sentence, any colorful phrase or original term, any
plan or idea—say so, either in a
footnote, bibliography, or parenthesis” (from “Academic
Honesty in the Writing of Essays and
Other Papers,” Carleton College, 1990).
7
Appendix 1
MEMORANDUM
To: The Potbelly Corporation’s Accounting Files
From: Student name
Date: Month Day, Year
Re: Accounting Issues Related to Revenue Recognition (Topic
606)

Background and Facts
Please see examples on Isidore for further ideas on what to
include in each section. This section
can be a few sentences that provides background on the
company. For example, is this a public
or private company? What is its primary business? What event
(without going into a lot of detail)
has taken place that is the reason for evaluating the accounting
issues that have arisen? It is
acceptable and encouraged to state at the end of this discussion
“The purpose of the
memorandum is to….” Write the memo as of today. Your role,
as a member of the accounting
department, is to research specific issues for the implementation
of Topic 606 and how it applies
to Potbelly Corporation.
Issue #1: Does the Company have more than one performance
obligation to the franchisee in
return for the franchise fee it receives at the beginning of the
franchise contract?
Background
Make sure someone unfamiliar with the issue who has not read
the company’s financial

statements can understand the issue at hand and the significance
of the issue based on your
background. Describe pertinent facts that have happened in the
real world. Then, describe any
relevant accounting decisions by the Company about Issue 1.
Conclusion
Tip: In a few sentences, summarize your conclusion for the
issue. The next section (Research
and Analysis) describes the research you found and how you
arrived at your conclusion. The
second part of the previous sentence is the analysis and is
important.
Research and Analysis
Tip: Make sure this section includes 1) what you find in the
codification (a well-cited quote is
acceptable) and 2) your interpretation of what you find in the
codification including how it
applies to the Company and leads to your conclusion. Keep in
mind that you want your memo to
be clear to someone who does not know the company’s issues at
hand. Do not make the reader
work or re-think the issues.
Issue #2: Does a loyalty or discount program such as Potbelly

Perks create a performance
obligation at the time that customers earn points towards future
rewards? How does this impact
the allocation of the transaction price, if at all?
Issue #3: When should the Company record revenue from gift
card breakage?
1 ©Cambridge Business
Publishers, 2014
SAMPLE ACCOUNTING ISSUES MEMO
The following accounting issues memo illustrates the
determination of whether Flyaway.com,
introduced in the opening scenario of Chapter 3, should report
its revenue on a gross or net basis.
Memorandum
To: Flyaway.com accounting files
From: Student Name
Date: X/X/XXXX
Re: Gross or Net Reporting of Online Ticket Sales Revenues

Background Note: This memo is only addresses one issue so all
background is included
here.
Flyaway.com (“Flyaway” or the “Company”) sells airline tickets
to customers through an online
platform, where customers can choose the airline of their
choice. Once a customer purchases a
ticket, Flyaway remits payment for the travel to the airline and
retains a commission (roughly
10% of the ticket’s value). The airlines set all ticket prices. If a
flight is canceled, the airline must
refund the customer. On the other hand, if the customer’s
payment is invalid, Flyaway.com
assumes credit risk.
Issue 1: Should Flyaway report its ticket revenue on a gross
basis (as a principal) or net (as an
agent)?
Conclusion
Net reporting is most appropriate for Flyaway’s recognition of
its online ticket sales revenues.
However, management will need to confirm the assumption that
Flyaway earns a stated

percentage of sales before reaching a final determination on its
accounting. In addition,
Flyaway.com can choose whether to disclose gross transaction
volume. If such disclosure is
made, Flyaway can further choose whether the disclosure should
be made parenthetically in the
income statement or in the footnotes.
Flyaway.com (“Flyaway” or the “Company”) must determine
whether its ticket sales revenue
should be reported gross (for the amount billed to the customer)
or net (for the amount retained
after remitting customer payments to the airlines). ASC 605–45
(Revenue Recognition—
Principal Agent Considerations) addresses transactions and
activities including:
15-2(b). Services offered by an entity that will be provided by a
third-party service
provider.
In this case, since the airline will be providing the actual
services (flights) to customers, this
arrangement is within the scope of this subtopic.

Presentation guidance within ASC 605–45 states that it is a
matter of judgment whether an entity
should report revenue on a gross or net basis (par. 45–1).
However, the guidance goes on to
2 Skills for Accounting and Auditing Research, 2nd Edition
present eight indicators which may support gross revenue
recognition, and three indicators that
may support net recognition. We will evaluate these indicators –
and their application to Flyaway
– in turn.
Indicators of Gross Reporting
Flyaway has analyzed the indicators of gross reporting in ASC
605–45 and has determined that
only one of these indicators is met for its ticket sales
arrangements. This indicator is:
1. The entity has credit risk.
ASC 605–45–45–13 describes this indicator as follows:
45–13 If an entity assumes credit risk for the amount billed
to the customer, that fact
may provide weaker evidence that the entity has risks and
rewards as a principal in the

transaction and, therefore, that it should record revenue gross
for that amount. Credit risk
exists if an entity is responsible for collecting the sales price
from a customer but must
pay the amount owed to a supplier after the supplier performs,
regardless of whether the
sales price is fully collected.
In this case, Flyaway (and not the airline) is responsible for
collecting customer payments and
remitting those payments (net of its fees) to the airline. In the
event a customer defaults on its
payment, Flyaway bears the risk of that default. Therefore, this
indicator of gross reporting is
met. However, par. 45–13 states that this indicator provides
“weaker evidence” that an entity has
risks and rewards as a principal in a transaction.
The seven other indicators of gross reporting, from par. 45–4
through 45–12, were not met for
this arrangement. These are:
1. The entity is the primary obligor in the arrangement (a
“strong” indicator).
Analysis: The airline is the primary obligor and is the entity
that must fulfill the promise

made to the customer (for travel).
2. The entity has general inventory risk or must pay the service
provider even if the
customer does not accept the service, also a “strong” indicator.
Analysis: Flyaway does not have inventory risk, nor is it
obligated to pay the airlines if
customers miss (or otherwise do not complete) their flights.
3. The entity has latitude in establishing price.
Analysis: The airlines (not Flyaway) set all ticket prices.
4. The entity changes the product or performs part of the service
ordered by the customer.
Analysis: Flyaway does not provide part of the service that the
customer most wants (air
travel).
5. The entity has discretion in supplier selection.
Analysis: The customer – and not Flyaway – determines which
airline (aka, supplier) will
perform the service.
6. The entity is involved in determining product or service
specifications.

3 ©Cambridge Business
Publishers, 2014
Analysis: Flyaway is not responsible for setting product or
service specifications. The
airlines select the dates and times of travel, locations, and so
on.
7. The entity has physical loss inventory risk.
Analysis: This indicator is not applicable to this arrangement.
As only one “weak” indicator of gross reporting is present, it
appears that gross recognition may
be inappropriate. Next, Flyaway must consider which indicators
of net reporting are present.
Indicators of Net Reporting
Three indicators are provided in ASC 605–45 which would
support net reporting.
1. The entity’s supplier is the primary obligor in the
arrangement (a “strong” indicator).
2. The amount the entity earns is fixed.
3. The supplier has credit risk.
Flyaway.com will analyze each of these indicators in turn. First,
ASC 605–45–45–16 describes

the primary obligor condition as follows:
45–16 Whether a supplier or an entity is responsible for
providing the product or
service desired by a customer is a strong indicator of the
entity's role in the transaction. If
a supplier (and not the entity) is responsible for fulfillment,
including the acceptability of
the products or services ordered or purchased by a customer,
that fact may indicate that
the entity does not have risks and rewards as principal in the
transaction and that it should
record revenue net based on the amount retained (that is, the
amount billed to the
customer less the amount paid to a supplier)…
Flyaway has concluded that this indicator of net reporting is
met for this arrangement. That is,
the airlines, acting as suppliers in this arrangement, are the
primary obligor that the customers
look to for fulfillment and acceptability of the service.
Next, par. 45–17 provides the following guidance with respect
to the second indicator of net
reporting:
45–17 If an entity earns a fixed dollar amount per customer

transaction regardless of
the amount billed to a customer or if it earns a stated percentage
of the amount billed to a
customer, that fact may indicate that the entity is an agent of
the supplier and should
record revenue net based on the amount retained.
This indicator also appears to be met, given that the facts of this
case state that Flyaway retains a
commission from each ticket sold, of roughly 10% of the ticket
price. However, it is not entirely
clear whether this is a stated percentage (consistent with the
par. 45–17 description). This issue
would need to be further clarified before an accounting
treatment is selected.
The final indicator of net reporting – that the supplier has credit
risk – is not met for this case.
That is, Flyaway, and not the supplier, has credit risk. Flyaway
assumes the risk that the sales
price has not been fully collected prior to delivery of the
service (date of travel).
As two indicators of net reporting are met, namely that Flyaway
is not the primary obligor, and
that Flyaway appears to earn a fixed percentage of sales, and
given that the primary obligor

indicator is a strong indicator, it appears that net reporting is
most appropriate for Flyaway. By
4 Skills for Accounting and Auditing Research, 2nd Edition
contrast, only one weak indicator of gross reporting was met
(related to the assumption of credit
risk). Accordingly, after weighing these two alternatives, it
appears that net reporting is most
appropriate for Flyaway’s recognition of its online ticket sales
revenues. However, management
will need to confirm the assumption that Flyaway earns a stated
percentage of sales before
reaching a final determination on its accounting.
ASC 605-45 provides the following disclosure guidance for
entities who report revenue on a net
basis:
50-1 Voluntary disclosure of gross transaction volume for
those revenues reported net
may be useful to users of financial statements. Such disclosure
can be made
parenthetically in the income statement or in the notes to the
financial statements.

However, if gross amounts are disclosed on the face of the
income statement, they shall
not be characterized as revenues (a description such as gross
billings may be appropriate),
nor shall they be reported in a column that sums to net income
or loss.
Flyaway.com can therefore choose whether to disclose gross
transaction volume. If such
disclosure is made, Flyaway can further choose whether the
disclosure should be made
parenthetically in the income statement or in the footnotes. The
company will need to consider
its past practices, practices of other companies in its industry,
and usefulness to financial
statement users when deciding whether and, if so how, such
disclosure should be made.
MEMORANDUM
To: The Potbelly Corporation’s Accounting Files
From: Student name
Date: Month Day, Year
Re: Accounting Issues Related to Revenue Recognition (Topic
606)

Background and Facts
Please see examples on Isidore for further ideas on what to
include in each section. This section can be a few sentences that
provides background on the company. For example, is this a
public or private company? What is its primary business? What
event (without going into a lot of detail) has taken place that is
the reason for evaluating the accounting issues that have arisen?
It is acceptable and encouraged to state at the end of this
discussion “The purpose of the memorandum is to….” Write the
memo as of today. Your role, as a member of the accounting
department, is to research specific issues for the implementation
of Topic 606 and how it applies to Potbelly Corporation.
Issue #1:Does the Company have more than one performance
obligation to the franchisee in return for the franchise fee it
receives at the beginning of the franchise contract?
Background
Make sure someone unfamiliar with the issue who has not read
the company’s financial statements can understand the issue at
hand and the significance of the issue based on your
background. Describe pertinent facts that have happened in the
real world. Then, describe any relevant accounting decisions by
the Company about Issue 1.
Conclusion
Tip: In a few sentences, summarize your conclusion for the
issue. The next section (Research and Analysis) describes the
research you found and how you arrived at your conclusion. The
second part of the previous sentence is the analysis and is
important.
Tip: Make sure this section includes 1) what you find in the
codification (a well-cited quote is acceptable) and 2) your
interpretation of what you find in the codification including
how it applies to the Company and leads to your conclusion.
Keep in mind that you want your memo to be clear to someone
who does not know the company’s issues at hand. Do not make
the reader work or re-think the issues.

Issue #2:Does a loyalty or discount program such as Potbelly
Perks create a performance obligation at the time that customers
earn points towards future rewards? How does this impact the
allocation of the transaction price, if at all?
Issue #3:When should the Company record revenue from gift
card breakage?
1

1 ACC 305 Research and Writing Assignment #2 Revenue .docx

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