Case 12-02 To Recognize or Not to Recognize, That Is the Question Shakespeare Inc. (“Shakespeare” or the “Company”) is a privately held book printing and publishing company with a December 31 year-end. The summary balance sheet as of December 31, 2010, included: Current assets Noncurrent assets Total assets Current liabilities Noncurrent liabilities Total liabilities Total shareholder equity $ 6,500,000 28,250,000 $34,750,000 $ 4,500,000 13,750,000 $18,250,000 $16,500,000

The summary results of operations for the year ended December 31, 2010, included revenue of $10.7 million and net income of $1.2 million. Shakespeare is planning to issue its financial statements on March 20, 2011. On March 18, 2011, Shakespeare’s management will
The interest rate on amounts drawn was reduced to LIBOR plus 3 percent (still subject to a 3.5 percent floor). The commitment fee on undrawn amounts reduced to 0.5 percent.

Acquisition of a New Publishing Company Using the funds from the modified line of credit, Shakespeare’s management drew $10 million from the additional capacity on March 10, 2011, to acquire a competitor publishing company in the northeast United States, Hamlet. On the basis of its initial assessment from the Company’s due diligence (that started shortly before the balance sheet date), management’s best estimate of the allocation of the $10 million purchase is as follows: $2 million of current assets and $8 million noncurrent assets (comprising $5 million of identifiable noncurrent assets, $2 million of intangible assets, and $1 million of goodwill). Hamlet’s prior-year audited financial statements included revenue of $3.2 million and Earnings Before Income Taxes, Depreciation, and Amortization (EBITDA) of $1.1 million. The estimated purchase price allocation has not been finalized and is expected to be after the financial statements are issued. Required: 1. Should the information pertaining to actual claims incurred as of the balance sheet date that became available after the balance sheet date be considered in determining management’s best estimate of the medical benefits payable? If so, how does this information impact the amount recognized or disclosed? 2. How, if at all, is