Lookhere.Com and StopIn.Com enter into a reciprocal agreement whereby (1) StopIn.Com is given

QUESTION

Lookhere.Com and StopIn.Com enter into a reciprocal agreement whereby (1) StopIn.Com is given valuable advertising space on the home page of Lookhere.Com
and (2) Lookhere.Com is given valuable advertising space on the home page of StopIn.Com. The main source of revenue for both StopIn.Com and Lookhere.Com is
sales of advertising on their respective websites. Both companies recognize advertising revenue received from the other company and recognize advertising
expense paid to the other company. Accounting regulators express support for the accounting treatment applied by these companies.

Required:

a. Do you believe these companies should be allowed to recognize revenue in conjunction with the advertising agreements described above?

b. Why do you believe these companies want to record revenue along with its offsetting expense for these transactions?

c. How would you assess such transactions in an analysis of these companies?
a) The revenue recognition stirs controversy. Many believe that it is reasonable for both companies to record offsetting of revenues and expenses from this contract. This is justified in that the transaction seemingly meets the usual revenue recognition criteria. Opponents of this treatment worry about uncertainities and completeness of the earning process. b) Revenue and revenue growth are considered good indicators of future prospects of dot.com (internet companies). The Internet companies also want to maximize the reported revenues even when those revenues are entirely offset with expenses. c) An analyst

ANSWER:

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