The following independent situations require professional judgement for determin
ID: 2512424 • Letter: T
Question
The following independent situations require professional judgement for determining when to recognize revenue from the transactions.
o Bear Paw Airlines sells you an advance purchase airline ticket in September for your flight home at Christmas.
o Future Shop Ltd. sells you a home theatre on a “no money down, no interest, and no payments for one year” promotional deal.
o The Blue Birds baseball team sells season tickets to games on-line. Fans can purchase the tickets at any time, although the season doesn't officially begin until April. It runs from April through October.
o River's Run Ltd. sells you a sweater. In August, you placed the order using River's Run's on-line catalogue. The sweater arrives in September and you charge it to your River's Run credit card. You receive and pay the credit card bill in October.
Required
1. Explain when revenue is recognized in each of these situations under ASPE.
2. Explain the new IFRS 15 model. Would the timing of revenue be the same under IFRS 15 as was given under ASPE for each of the 4 scenarios?
Explanation / Answer
1. Under the accrual basis of accounting:
events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.
net income is calculated by matching cash outflows against cash inflows.
cash must be received before revenue is recognized.
2. A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be earned?
November 30
December 1
December 10
December 5
3. In a service-type business, revenue is considered earned:
at the end of the year.
when the service is performed.
when cash is received.
at the end of the month.
4. evenly over the term of the loan
5. in September
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