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Chapter 18: Q4CA (page 1047)

CA18-4 (Recognition of Revenue鈥擳heory) Revenue is recognized for accounting purposes when a performance obligation is satisfied. In some situations, revenue is recognized over time as the fair values of assets and liabilities change. In other situations, however, accountants have developed guidelines for recognizing revenue at the point of sale.

Instructions

(Ignore income taxes.)

(a) Explain and justify why revenue is often recognized at time of sale.

(b) Explain in what situations it would be appropriate to recognize revenue over time.

Short Answer

Expert verified
  1. Revenue is recognized at the time of sale because thecontrol of assets is transferred to the buyer at this time only.
  2. Revenue is recognized over time when one among three specified conditions is satisfied.

Step by step solution

01

Definition of Revenue Recognition

The principle reflecting the conditions under which the business entity must recognize the revenue is known as revenue recognition. It also provides information about how to account for revenue.

02

Justification for recognizing revenue at the time of sale

Revenue must be recognized at the time of sale because the control of assets is transferred to the buyer at the time of sale only. Time of sale is considered as deciding factor for the time when the performance obligation is satisfied. The asset is said to be controlled by the customer when they can use the asset and generate benefits from its use.

03

Situations under which revenue must Be recognized over time

The business entity must recognize revenue over time when one of the following conditions are met:

  1. The customer receives the benefits as the seller completes the performance.
  2. The customer controls the asset when the seller creates it.
  3. The seller cannot use the created asset for other alternative purposes.

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Most popular questions from this chapter

In measuring the transaction price, explain the accounting for (a) time value of money and (b) noncash consideration.

What was viewed as a major criticism of GAAP as it relates to revenue recognition?

What is a performance obligation? Under what conditions does a performance obligation exist?

Travel Inc. sells tickets for a Caribbean cruise on ShipAway Cruise Lines to Carmel Company employees. The total cruise package price to Carmel Company employees is \(70,000. Travel Inc. receives a commission of 6% of the total price. Travel Inc. therefore remits \)65,800 to ShipAway. Prepare the journal entry to record the remittance and revenue recognized by Travel Inc. on this transaction.

Jupiter Company sells goods to Danone Inc. by accepting a note receivable on January 2, 2017. The goods have a sales price of \(610,000 (cost of \)500,000). The terms are net 30. If Danone pays within 5 days, however, it receives a cash discount of $10,000. Past history indicates that the cash discount will be taken. On January 28, 2017, Danone makes payment to Jupiter for the full sales price.

Instructions

(a) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the net method.

(b) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the gross method.
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