University:
Michigan State University
Course:
ACC 300 | Intermediate Financial Accounting I
Academic year:

2021
Views:

90

Pages:

1
Author:

Prince Sampson

SOLUTIONS TO CRITICAL THINKING CASE S 15 Minutes, Medium CASE 3.1 REVENUE RECOGNITION Revenue is realized in the period that services are rendered to customers or goods are delivered to customers. Using this principle as a guide, the three independent situations are analyzed below: a. Period of flight. Airlines earn revenue by rendering a service—transportation—to their customers. Therefore, revenue should be recognized in the accounting period in which this service is rendered. (Selling a ticket does not qualify as “delivering goods” to the customer. The ticket is not a “product”-it is merely a receipt showing that the customer has already made payment for services to be rendered in the future.) b. Period furniture sold. In this case the furniture store delivers goods to its customers and acquires an account receivable at the date of sale. This is the period in which revenue should be recognized, even though the account receivable may not be collected for many months. Collection of an account receivable does not produce revenue; this action merely converts one asset (receivable) into another (cash). c. Periods that magazines are mailed to customers. The “goods” that a magazine publisher delivers to its customers are magazines. Thus, the publisher does not earn its revenue until the magazines are delivered to the customers. (For practical purposes, the act of mailing the magazine may be viewed as “delivery.”) Case 3.1