For each of the following independent situations, answer the specific revenue co

Question

For each of the following independent situations, answer the specific revenue concerns (provide authoritative support where appropriate). 1) Company A enters into a contract on February 1, 2018 to manage rental property for Company B for the next 5 years. Company A will provide all services related to the management of the property and will receive a monthly payment equal to 2% of the gross rentals from the property. Historically, property of this type in this area has averaged an 85% occupancy rate. How should Company A determine the amount and timing of revenue recognition under this contract? 2) Company A is constructing a high-rise luxury apartment building. The building will contain 80 apartments of similar size and layout. During 2018, Company A receives a deposit of $100,000 from a customer for one of the apartments. The deposit is only refundable if Company A fails to complete the building. Company A expects completion early in 2019. The remainder of the apartment's sale price ($900,000) is due from the customer at the completion of the building when the customer can take possession. Can Company A recognize revenue in 2018 related to the contract with the customer paying the deposit? 3) Bakery A has an incentive plan that gives its customers one point for each doughnut purchased. A customer that has accumulated 15 points can receive a free doughnut. During the current year, Bakery A sold 201.600 doughnuts at $1.20 each. Bakery A expects 90% of the points to be redeemed and 105,000 were redeemed in the current year. How much revenue should Bakery A recognize in the current year related to the sale of the doughnuts and the incentive plan?

Explanation / Answer

Requirement 1 Company A should follow the accrual basis of accounting and book the revenue on actual basis. For example, No. of months for which property is actually let out during accounting year and amount for which property is let out during this period. The company should book 2% of such actual rental amount as revenue and not on the estimated basis. 2 Yes, Company A can recognize the revenue if it very much probable that the completion will take place in future date and there are no uncertainty about such completion of building. 3 90% of 201600 = 181440 Less : redeeded in the current year 105000 Balance will be redeemed eventually So the revenue to be booked is as follows Sale of Doughnuts =201600*1.2 241920 Less : Sale incentive expenses with corresponding credit to current liability =(181440/15)*1.2 14515.2 Add : Sale Incentive expenses to the extent of reedemed with corresponding debit to current liability =(105000/15)*1.2 8400 Net Revenue from sales 235804.8

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