Chemicals Incorporated (ChemInc) is a public company (i.e., an SEC registrant) with a calendar year-end. Its headquarters and manufacturing facilities are located in Chicago, Illinois.

ChemInc specializes in manufacturing medical compounds. Given the nature of these medical compounds, many require special storage until they are used in formulating drugs and/or medications by a pharmaceutical company. The special storage requirements include strict regulation of the temperature, air pressure, and humidity. ChemInc stores the medical compounds it manufactures in the appropriate storage facilities until they are purchased by and shipped to a customer. Qualified shipping specialists are used to ship the medical compounds to the customer.
On December 15, 2012, ChemInc enters into a bill-and-hold transaction with Bond Pharmaceutical (Bond). On that date, ChemInc receives a written order from Bond for $1,000,000 of Medical Compound A (MCA). The inventory costs associated with the MCA being purchased by Bond are $150,000. MCA is one of the medical compounds that require special storage. Bond is in the process of building a storage chamber within its manufacturing facility that will comply with the special storage requirements applicable to MCA. However, the construction of the storage chamber will not be complete until sometime in the first quarter of 2013. As such, Bond requested in its order that ChemInc store the MCA purchased until Bond can take delivery into its special storage chamber. While not stated in the contract, the CFO of Bond is confident that completion of the special storage chamber will occur by February 1, 2013. However, the contract does state that the MCA will be delivered to Bond at the earlier of when the storage chamber iscompleted or March 31, 2013. Bond is placing the order for MCA prior to completion of its special storage chamber because Bond is aware that ChemInc (1) schedules production runs for MCA only once or twice a year, (2) completed a production run of MCA in November 2012, (3) keeps a limited amount of MCA on hand to satisfy unplanned customer orders, and (4) charges a significant premium to schedule a special production run of MCA. In addition, Bond needs the MCA to use in the production of one of its new and greatly anticipated medications. Bond has already scheduled the production run for this new medication for the beginning of the second quarter of 2013.
ChemInc agrees to sell $1,000,000 of MCA to Bond on December 20, 2012, and store the product until Bond can take delivery into its newly constructed storage chamber. The sales agreement between ChemInc and Bond provides for the following:
• ChemInc must segregate the MCA purchased by Bond from the rest of ChemInc’s inventory. Bond explicitly acknowledges that ChemInc has no further performance obligations related to the purchased MCA once ChemInc segregates the purchased MCA from the rest of ChemInc’s inventory.
• ChemInc attests to the fact that the MCA purchased by Bond is complete and ready for shipment upon its segregation by ChemInc.
• ChemInc requires payment from Bond under its normal payment terms, which require Bond to pay ChemInc for the purchased MCA by December 30, 2012.
• Bond agrees that its purchase commitment is noncancelable.

ChemInc segregates the inventory, as called for in the agreement, on December 20, 2012. Also, ChemInc sends an invoice to Bond for $1,000,000 for the MCA purchased by Bond on the same date, and ChemInc receives payment of $1,000,000 from Bond on December 30, 2012. The price of the MCA sold to Bond is fixed and is not subject to any contingencies. Bond is in good financial health and has always honored the payment terms related to past purchases of other medical compounds from ChemInc.
ChemInc is considering when it should recognize the revenue related to its bill-and-hold transaction with Bond. In doing so, ChemInc asks for your help. Prepare a memo addressing the following questions. Base your analysis of the following questions on the relevant authoritative literature and discuss the support in that literature for your conclusions. Be sure to cite the relevant components of the Codification (available at: http://asc.fasb.org) in your discussion. Citations are not required for journal entries.

1. What are the accounting issue(s) and the relevant components of the authoritative literature?

2. How does the fact that ChemInc has not shipped the MCA to Bond by the end of the year affect the recognition of revenue by ChemInc in 2012? What other issues must be considered before deciding when ChemInc can recognize revenue? Explain your answer.

3. What are the necessary journal entries for the quarters ending December 31, 2012, and
March 31, 2013?

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