Note 10 – 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. Accordingly, revenues are recognized at shipping point, which is the point in time the customer obtains control of the products. 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 award program in gross sales and discounts and allowances, as opposed to recording the net costs in operating and selling expenses.

Disaggregation of Revenue

Please refer to Note 7 – 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 condensed 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 condensed consolidated 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 condensed statement of earnings for the three months ended November 30, 2017 was as follows:

							Without
	As Reported			Adjustments			Adoption
GROSS SALES:	$	44,383,700		$	(2,489,100	)	$	41,894,600
Less discounts and allowances		(9,249,500	)		2,487,200			(6,762,300	)
Transportation revenue		3,775,700			-			3,775,700
NET REVENUES		38,909,900			(1,900	)		38,908,000
COST OF GOODS SOLD		12,211,700			(1,716,900	)		10,494,800
Gross margin		26,698,200			1,715,000			28,413,200

OPERATING EXPENSE:
Operating and selling		6,121,100			1,716,200			7,837,300
Sales commissions		12,510,400			-			12,510,400
General and administrative		4,735,200			-			4,735,200
Total operating expenses		23,366,700			1,716,200			25,082,900

INTEREST EXPENSE		287,600			-			287,600
OTHER INCOME		(388,900	)		(1,200	)		(390,100	)

EARNINGS BEFORE INCOME TAXES		3,432,800			-			3,432,800

INCOME TAXES		1,304,400			-			1,304,400
NET EARNINGS	$	2,128,400		$	-		$	2,128,400

As a result of applying Topic 606, the impact to the Company’s operating results by reporting segment for the three months ended November 30, 2017 was as follows:

UBAM

							Without
	As Reported			Adjustments			Adoption
GROSS SALES:	$	39,250,800		$	(2,489,100	)	$	36,761,700
Less discounts and allowances		(6,546,200	)		2,487,200			(4,059,000	)
Transportation revenue		3,765,700			-			3,765,700
NET REVENUES		36,470,300			(1,900	)		36,468,400
COST OF GOODS SOLD		10,831,100			(1,716,900	)		9,114,200
Gross margin		25,639,200			1,715,000			27,354,200

OPERATING EXPENSE:
Operating and selling		5,144,000			1,716,200			6,860,200
Sales commissions		12,420,000			-			12,420,000
General and administrative		1,158,600			-			1,158,600
Total operating expenses		18,722,600			1,716,200			20,438,800
OPERATING INCOME	$	6,916,600		$	(1,200	)	$	6,915,400

Publishing

						Without
	As Reported			Adjustments		Adoption
GROSS SALES:	$	5,132,900		$	-	$	5,132,900
Less discounts and allowances		(2,703,300	)		-		(2,703,300	)
Transportation revenue		10,000			-		10,000
NET REVENUES		2,439,600			-		2,439,600
COST OF GOODS SOLD		1,380,600			-		1,380,600
Gross margin		1,059,000			-		1,059,000

OPERATING EXPENSE:
Operating and selling		337,800			-		337,800
Sales commissions		90,400			-		90,400
General and administrative		74,000			-		74,000
Total operating expenses		502,200			-		502,200
OPERATING INCOME	$	556,800		$	-	$	556,800

As a result of applying Topic 606, the impact to the Company’s condensed statement of earnings for the nine months ended November 30, 2017 was as follows:

							Without
	As Reported			Adjustments			Adoption
GROSS SALES:	$	109,395,400		$	(8,405,900	)	$	100,989,500
Less discounts and allowances		(28,317,300	)		8,388,000			(19,929,300	)
Transportation revenue		8,959,900			-			8,959,900
NET REVENUES		90,038,000			(17,900	)		90,020,100
COST OF GOODS SOLD		28,460,800			(3,881,600	)		24,579,200
Gross margin		61,577,200			3,863,700			65,440,900

OPERATING EXPENSE:
Operating and selling		13,684,200			3,865,700			17,549,900
Sales commissions		28,759,300			-			28,759,300
General and administrative		12,359,600			-			12,359,600
Total operating expenses		54,803,100			3,865,700			58,668,800

INTEREST EXPENSE		863,800			-			863,800
OTHER INCOME		(1,187,400	)		(2,000	)		(1,189,400	)

EARNINGS BEFORE INCOME TAXES		7,097,700			-			7,097,700

INCOME TAXES		2,707,100			-			2,707,100
NET EARNINGS	$	4,390,600		$	-		$	4,390,600

As a result of applying Topic 606, the impact to the Company’s operating results by reporting segment for the nine months ended November 30, 2017 was as follows:

UBAM

							Without
	As Reported			Adjustments			Adoption
GROSS SALES:	$	95,549,800		$	(8,406,600	)	$	87,143,200
Less discounts and allowances		(20,984,000	)		8,388,700			(12,595,300	)
Transportation revenue		8,933,500			-			8,933,500
NET REVENUES		83,499,300			(17,900	)		83,481,400
COST OF GOODS SOLD		24,821,100			(3,881,600	)		20,939,500
Gross margin		58,678,200			3,863,700			62,541,900

OPERATING EXPENSE:
Operating and selling		10,887,200			3,864,900			14,752,100
Sales commissions		28,507,800			-			28,507,800
General and administrative		3,416,800			-			3,416,800
Total operating expenses		42,811,800			3,864,900			46,676,700
OPERATING INCOME	$	15,866,400		$	(1,200	)	$	15,865,200

Publishing

							Without
	As Reported			Adjustments			Adoption
GROSS SALES:	$	13,845,600		$	700		$	13,846,300
Less discounts and allowances		(7,333,300	)		(700	)		(7,334,000	)
Transportation revenue		26,400			-			26,400
NET REVENUES		6,538,700			-			6,538,700
COST OF GOODS SOLD		3,639,700			-			3,639,700
Gross margin		2,899,000			-			2,899,000

OPERATING EXPENSE:
Operating and selling		876,800			-			876,800
Sales commissions		249,500			-			249,500
General and administrative		258,500			-			258,500
Total operating expenses		1,384,800			-			1,384,800
OPERATING INCOME	$	1,514,200		$	-		$	1,514,200