11. REVENUE RECOGNITION

Revenue is derived from the sales of children’s books and related products which are generally capable of being distinct and accounted for as a single performance obligation to deliver tangible goods. Substantially all of our books are sold to end consumers and publishing retail outlets. Revenues are recognized at shipping point, which is the point in time the customer obtains control of the products and risk of loss and rewards of ownership have been transferred. Shipping and handling fees are recorded as operating and selling expenses when the product is shipped and revenue is recognized. The Company estimates product returns based on historical return rates. The majority of the Company's contracts have a single performance obligation and are short term in nature. Sales taxes, that are collected from customers and remitted to governmental authorities, are accounted for on a net basis and therefore are excluded from net sales.

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On March 1, 2018, the Company adopted Topic 606, as prescribed by the FASB, using the full retrospective method. Results for all reporting periods are presented under Topic 606.

There was no change to net earnings or retained earnings due to the adoption of Topic 606, with the impact primarily related to the recording of our hostess awards program in gross sales and discounts and allowances, as opposed to recording the net costs in operating and selling expenses.

Disaggregation of Revenue

Refer to Note 13 – Business Segments for revenue by segment.

Arrangements with Multiple Performance Obligations

Certain contracts associated with the hostess awards program include sales incentives, such as discounted or free products. These incentives provide a separate performance obligation in the contract and material right to the customer. The transaction price is allocated to the material right based on its relative standalone selling price and is recognized in revenue as the performance obligations are satisfied, which occurs at shipping point or at the expiration of the material right. As our sales incentives are delivered with the associated products ordered, there is no deferral required. Revenue allocated to the material right are recognized in gross sales, discounts and allowances and cost of goods sold in our statement of earnings.

Practical Expedients and Exemptions

The Company generally expenses sales commissions when incurred. These costs are recorded within operating expenses. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Impact on Financial Statements

As a result of applying Topic 606, the impact to the Company’s balance sheet as of February 28, 2018 was as follows:

						Without
	As Reported		Adjustments			Adoption
ASSETS
Accounts receivable-Net	$	2,913,700	$	(99,900	)	$	2,813,800
Inventories-Net		26,618,600		(100	)		26,618,500
Prepaid expenses and other assets		1,259,000		(117,000	)		1,142,000
Total current assets		33,514,600		(217,000	)		33,297,600

TOTAL ASSETS		61,837,900		(217,000	)		61,620,900

LIABILITIES
Other current liabilities		3,517,900		(217,000	)		3,300,900
Total liabilities		41,435,800		(217,000	)		41,218,800

As a result of applying Topic 606, the impact to the Company’s statement of earnings for the year ended February 28, 2018 was as follows:

							Without
	As Reported			Adjustments			Adoption
GROSS SALES	$	139,040,400		$	(13,193,200	)	$	125,847,200
Less discounts and allowances		(38,103,500	)		13,174,700			(24,928,800	)
Transportation revenue		11,047,700			-			11,047,700
NET REVENUES		111,984,600			(18,500	)		111,966,100
COST OF GOODS SOLD		35,824,300			(4,893,000	)		30,931,300
Gross margin		76,160,300			4,874,500			81,034,800

OPERATING EXPENSE:
Operating and selling		17,694,700			4,876,500			22,571,200
Sales commissions		35,359,000			-			35,359,000
General and administrative		15,736,300			-			15,736,300
Total operating expenses		68,790,000			4,876,500			73,666,500

INTEREST EXPENSE		1,119,500			-			1,119,500
OTHER INCOME		(1,581,900	)		(2,000	)		(1,583,900	)

EARNINGS BEFORE INCOME TAXES		7,832,700			-			7,832,700

INCOME TAXES		2,618,000			-			2,618,000
NET EARNINGS	$	5,214,700		$	-		$	5,214,700

As a result of applying Topic 606, the impact to the Company’s operating results by reporting segment for the year ended February 28, 2018 was as follows:

UBAM

							Without
	As Reported			Adjustments			Adoption
GROSS SALES	$	121,364,700		$	(13,193,900	)	$	108,170,800
Less discounts and allowances		(28,657,900	)		13,175,400			(15,482,500	)
Transportation revenue		11,010,300			-			11,010,300
NET REVENUES		103,717,100			(18,500	)		103,698,600
COST OF GOODS SOLD		31,132,800			(4,893,000	)		26,239,800
Gross margin		72,584,300			4,874,500			77,458,800

OPERATING EXPENSE:
Operating and selling		14,509,500			4,875,500			19,385,000
Sales commissions		35,043,200			-			35,043,200
General and administrative		3,602,000			-			3,602,000
Total operating expenses		53,154,700			4,875,500			58,030,200
OPERATING INCOME	$	19,429,600		$	(1,000	)	$	19,428,600

Publishing

							Without
	As Reported			Adjustments			Adoption
GROSS SALES	$	17,675,700		$	700		$	17,676,400
Less discounts and allowances		(9,445,600	)		(700	)		(9,446,300	)
Transportation revenue		37,400			-			37,400
NET REVENUES		8,267,500			-			8,267,500
COST OF GOODS SOLD		4,691,500			-			4,691,500
Gross margin		3,576,000			-			3,576,000

OPERATING EXPENSE:
Operating and selling		987,500			-			987,500
Sales commissions		315,700			-			315,700
General and administrative		509,600			-			509,600
Total operating expenses		1,812,800			-			1,812,800
OPERATING INCOME	$	1,763,200		$	-		$	1,763,200