Question

Revenue Recognition For each of the following transactions, events, or circumstances, indicate whether the recognition criteria for revenues and gains are met and provide support for your answer. (a) An order of $25,000 for merchandise is received from a customer. (b) The value of timberlands increases by $40,000 for the year due to normal growth. (c) Accounting services are rendered to a client on account. (d) A 1991 investment was made in land at a cost of $80,000. The land currently has a fair market value of $107,000. (e) Cash of $5,600 is collected from the sale of a gift certificate that is redeemable in the next accounting period. (f) Cash of $7,500 is collected from subscribers for subscription fees to a monthly magazine. The subscription period is two years. (g) You owe a creditor $1,500, payable in 30 days. The creditor has cash flow difficulties and has agreed to allow you to retire the debt in full with an immediate payment of $1,200.

Answer 1

Revenue can only be recognised in all four Situations:

1) Goods has been Delivered & Services has been rendered to Customer

2) Seller have the assurance that collection of amount is assured

3) Price has been determined or fixed by the seller

4) Identification of the amount on completion basis.

A) No revenue recohgnition criteria is not met. Since Condition (1 & 2) of revenue recognition not met

B) No revenue recognition Since the value has been increased due to growth but no sale has been made.

C) Revenue needs to be recognised as all four conditions are satisfied. In absence of information it is assumed that amount is collectable.

D) No revenue recognition Since the value has been increased due to increase in fair value but no sale has been made.

E) Revenue needs to be recognised as all four conditions are satisfied.

F) Revenue needs to be recognised as all four conditions are satisfied.

G) Amount of $300 can be taken as a discount as it is satisfying first three conditions of Revenue recognition