A Token for your Thoughts

As I inserted the 10 dollar bill into the token machine at Chuck E. Cheese’s I had the same thought that most people have – when does CEC recognize the revenue for this transaction. J  Now that their token machine has my money does it mean that the earnings process is complete?  Maybe it’s a moot point because it did not take long for my son and I to rid ourselves of the tokens.  Within about 15 minutes the tokens were absorbed by the arcade games.  CEC could then safely claim that the earnings process was complete. So, they could book the $10 of revenue at that time.  It’s a good thing for CEC that we did not decide to leave with a few tokens in our pocket.  That type of thing could play havoc on their accounting system.

But what about all those tickets that we earned? My son did not find anything that he wanted to trade for the number of tickets that we had, so, we will just hold onto them until we come back next time. After we get another $10-$20 in tokens and toss a few more skee-balls, he should have enough tickets to get the model car that he was eyeing.  In the meantime, CEC management will have to sleep at night knowing that I already hold enough tickets to claim several small plastic toys from their gift shop.

Note: CEC annual reports provide an explanation of how they account for these transactions.

Gambling on (the) Pool

I recently heard a radio advertisement for a pool building company.  I do not recall all of the details, but the crux of the promotion was as follows.  Over the next 90 days, the company would enter all new pool clients into a contest.  If Phoenix had a record-high temperature (above 118 degrees Fahrenheit) on the upcoming July 4^th, then all new pool clients would receive $12,000 cash.  My first thought – how should the company account for this potential cost?

Likely, the firm has insured this event with some third-party.  Thus, their costs consist of the policy premium plus the cost of the coinsurance/deductible that the pool company will pay if the record-high temperature is reached. This contingent liability is where the issue arises.  Every time a pool is sold, the firm’s potential liability increases but the likelihood of the firm incurring any obligation remains at an equally unlikely level.  It is difficult to measure but considering that the average July 4^th high temperature is 107 degrees and the highest temperature ever recorded in Phoenix was 122 degrees, the chance that a record-high temperature will occur on that day is quite small. Thus, the company will likely not report any related liability on the balance sheet.