Several Situations in which the timing of revenue is in doubt are listed below.

Question

Several Situations in which the timing of revenue is in doubt are listed below.

a. An appliance manufacturer sent out a truckload of dishwashers FOB destination in late January; they arrived February 2 and were paid for in March. Monthly income statements are prepared.
b. A magazine publisher sold two-year subscriptions for a monthly publication.
c. An auto dealer sold five-year service contracts for cash at the time of the auto sale.
d. A home decorating center sold wallpaper with a 60-day right to return up to 25% of an order. For the past several years, returns have been fairly consistent, with one in 10 customers returning some paper; the average return is 1.2 rolls.
e. A bridge construction firm is involved in only one project at a time; the average project takes three years. The contract price is firm and definitely collectible; total costs of the project can be estimated.

Required. First, explain what events generally must occur before any revenue is recognized. Then discuss when each of the above situations should result in revenue recognition, and why.

Explanation / Answer

Received advances are not recognized as revenues, but as liabilities (deferred income), until the conditions (1.) and (2.) are met. Revenues are realized when cash or claims to cash (receivable) are received in exchange for goods or services. Revenues are realizable when assets received in such exchange are readily convertible to cash or claim to cash. Revenues are earned when such goods/services are transferred/rendered. Both such payment assurance and final delivery completion (with a provision for returns, warranty claims, etc.), are required for revenue recognition. Recognition of revenue from four types of transactions: Revenues from selling inventory are recognized at the date of sale often interpreted as the date of delivery. Revenues from rendering services are recognized when services are completed and billed. Revenue from permission to use company’s assets (e.g. interests for using money, rent for using fixed assets, and royalties for using intangible assets) is recognized as time passes or as assets are used. Revenue from selling an asset other than inventory is recognized at the point of sale, when it takes place. In practice, this means that revenue is recognized when an invoice has been sent.

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