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Biovail Case

1. How many truckloads of product are actually required to carry $10 million of product? Show your calculations. Given: a. 1 Wellbutrin XL tablet is estimated to be 1.5 cm3 (this includes the packing space) b. A 18-wheeler trailers dimensions are: 17m x 4.5m x 2.5m Since the tablet and the trailer are using different units of measurements we need to convert the trailer dimensions to centimeters before we can calculate the volumes. To convert meters into centimeters the ratio is: 1meter = 100 centimeters 17m= 1,700 centimeters 4.5m = 450 centimeters 2.5m = 250 centimeters To calculate volume : Volume of a rectangular prism = a x b x c Volume= 1,700 x 450 x 250 Volume = 191,250,000 cm3 c. To find out how many Wellbutrin XL tablets fit into a trailer 1.5x=191,250,000 X=127,500,000 d. How much revenue does Biovail get from a single pill ? Biovail +400%(Distributor mark up)+35%(wholesaler margin) = $2.83 Biovail Distributor Wholesaler Retailer 0.42 2.10 / 500% 2.83/135%=2.10 e. The total value of tablet in one fully loaded trailer 127,500,000 x 0.42= $53,550,000 One truck can carry $10 million worth of Wellbutrin XL tablet product. 2. How should the company recognize revenue based upon the two possible FOB structures mentioned in the case? According to GAAP, four conditions must be met in order to recognize revenue: 1. Persuasive evidence of an arrangement exists: although the case does not provide extra information on this aspect, it seems clear that there is an ongoing relationship between Biovail and the distributor and that certainly there was a bill, purchase order and/or invoice in order to support this sale. 2. Sellers price to the buyer is fixed or determinable: the case provides clear evidence in this aspect. 3. Collection is reasonably assured: given the ongoing relationship between Biovail and the distributor, it appears evident that this aspect was probably covered as well.

4. Delivery has occurred or services have been rendered: this is the key point of conflict in the Biovails case. There are basically two different moments of revenue recognition according to the FOB condition: a. FOB Shipping:

The company should recognize revenue at the moment/in the period in which product leaves Biovail shipping dock at the warehouse since in that precise moment both ownership and responsibility over the goods is transferred from Biovail to the client. b. FOB Destination:

The company should recognize revenue at the moment/in the period in which product is delivered to the distributors facility since in that precise moment both ownership and responsibility over the goods is transferred from Biovail to the client. Given the facts and information presented in the case, Biovail should have recognized revenue following the FOB Destination structure. However, Biovail recognized revenue as if it was operating under FOB Shipping, probably in an attempt to boast revenue for the period. 3. How does the accident affect the stated revenues under different FOB contract structures? Explain your reasoning? Biovail recognizes revenues when the product leaves Biovails FOB shipping point then it is recognizing revenue before it has been earned and realized. Thus, the truck accident could not have impacted Biovail's third quarter financial results because the truck left for North Carolina on September 30, too late to possibly reach North Carolina prior to the end of the quarter. Even if the terms had been "F.O.B. Shipping," meaning that Biovail could have recognized the revenue from the sale at the moment the product left Biovail's facility, the truck accident still could not have impacted Biovail's third quarter financial result. The truck accident would have had no impact on Biovail's third quarter financial results because the title to the product -and the risk associated with the accident would have passed to the distributor as soon as the truck left Biovail's plant 4. Are you concerned about the companys treatment of analysts who cover the stock? Would you want to be an analyst covering this company? Yes I am concerned. I would not want to be an analyst covering their stock because it would put me in an uncomfortable position. If there was an evidence that Biovail had misleading financial statements my integrity would tell me to tell the truth and give an honest recommendation. However, I would be worried because I would not want an investigation tainting my innocent name and leading to separation from my employment.

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