ASC Case B
Dr. Jason Porter
Accounting 414
October 9, 2012
Jenai Jasper
Katie Shepherd
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Board of Directors
Challis Medical Center
123 N. Money Road
Challis, Idaho 83608
October 9, 2012
Dear Challis Medical Center Board of Directors,
We are writing in regards to your recent questions concerning reporting a guarantee of revenue.
It is of our understanding that in order for your office to attract a dentist, you guarantee the
prospective dentist gross patient revenues of at least $120,000 for the first two years of practice
in your area. Since Challis Medical Center is not going to employ the new dentist and therefore
the doctor will be accountable for all operating costs incurred for the business.
Since CMC has guaranteed certain revenues to the dentist, CMC needs to recognize and report
the guarantee of revenue. This should be reported as a liability to CMC and the offsetting entry
would be an expense (ASC 460-10-55-23). This will need to be recognized in the statement of
financial position at the inception of the guarantee (ASC 460-10-25-4). So, CMC should be
including the guarantee in its current year’s financial statements as soon as the guarantee has
been offered and accepted.
In conclusion, the entry should be made for the current year whereas CMC has made the
guarantee in this current year. There should be a debit to a business expense account and a credit
for the guarantee of revenue as a liability. In future years, the recording of this guarantee would
depend on the net revenues the dentist produces each year. If he does not reach the $120,000 in
either of the first two years, CMC will be liable for the difference.
An example applying to this situation can be referred to in the Accounting Standards
Codification under 460-10-55-11. This case shows that it is necessary for recording the minimum
revenue guarantee. Refer to the attached pages for copies of all related codifications (in order of
to which they were referred).
We hope that this is helpful to you. If you have any remaining questions concerning this situation
or another, feel free to email us at weknowaccounting@uidaho.edu or by phone at
(208)-888-1234.
Thank you,
Jenai Jasper and Katie Shepherd
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460-10-55-23
Although paragraph 460-10-25-4 does not prescribe a specific account, the
following illustrate a guarantor's offsetting entries when it recognizes the liability at the inception
of the guarantee:
a. If the guarantee were issued in a standalone transaction for a premium, the
offsetting entry would be consideration received (such as cash or a receivable). b. If the guarantee were issued in conjunction with the sale of assets, a product,
or a business, the overall proceeds (such as the cash received or receivable) would be
allocated between the consideration being remitted to the guarantor for issuing the
guarantee and the proceeds from the sale. That allocation would affect the calculation of
the gain or loss on the sale transaction. c. If the guarantee were issued in conjunction with the formation of a partially
owned business or a venture accounted for under the equity method, the recognition of
the liability for the guarantee would result in an increase to the carrying amount of the
investment. d. If a residual value guarantee were provided by a lessee-guarantor when
entering into an operating lease, the offsetting entry (representing a payment in kind
made by the lessee when entering into the operating lease) would be reflected as prepaid
rent, which would be accounted for under Section 840-20-25. e. If a guarantee were issued to an unrelated party for no consideration on a
standalone basis (that is, not in conjunction with any other transaction or ownership
relationship), the offsetting entry would be to expense. 460-10-25-4
At the inception of a guarantee, a guarantor shall recognize in its statement of
financial position a liability for that guarantee. This Subsection does not prescribe a specific
account for the guarantor’s offsetting entry when it recognizes a liability at the inception of a
guarantee. That offsetting entry depends on the circumstances in which the guarantee was issued.
See paragraph 460-10-55-23 for implementation guidance.
460-10-55-11
Another example is a guarantee granted to a nonemployee physician by a
not-for-profit health care facility that has recruited the physician to move to the facility's
geographical area to establish a practice. The health care facility, as the guarantor, has agreed to
make payments to the newly arrived physician (the guaranteed party) at the end of specific
periods of time if the gross revenues (gross receipts) generated by the physician's new practice
during that period of time do not equal or exceed a specific dollar amount. This Topic applies to
minimum revenue guarantees granted to physicians regardless of whether the physician's practice
qualifies as a business.
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