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

Revenue from services is generally recognised as the service is performed. The performance of service is measured by two methods as under

A) Completed Servise Contract Method= Revenue is recognized when service is about to completed and no significant uncertainities exist about collection of amount of service charge.

B) Proportinate Completion Method= Revenue is recognized by refrence to the performance to rech act. The revenue is recognized under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. Further no significant uncertainities exist about collection of amount of service charge.

From the above we can answer-

1) As the company has completed all the management serivice hence it should recognize the revenue now on the basis of Contract Value * occupacy rate * % given

2) For real esate project revenue should be recognized when the seller has transfered to the buyer all significant risks and rewards of ownership and seller retains no effective control of the rel estate.

from the above Company A should not recognize the deposit as revenue in year 2018

3) Company should recognize revenue as follows-

No of Doughnut sold =201600

No of points = 201600*1= 201600

Reedem= 105000

Total doughnut given on free = 105000/15= 7000

Revenue from sale= 201600*1.20=241920

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