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Chapter 2: CA2-5 (page 70)

(Revenue Recognition Principle) After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the revenue is recognized with the publication of every issue of the company's magazine. She feels that the 鈥渃rucial event鈥� in the process of earning revenue in the magazine business is the cash sale of the subscription. She says that she does not understand why most of the revenue cannot be 鈥渞ecognized" in the period of the cash sale. Instructions

Discuss the propriety of timing the recognition of revenue in Piper Publishing Company's accounts with:

(a) The cash sale of the magazine subscription.

(b) The publication of the magazine every month.

(c) Over time, as the magazines are published and delivered to customers.

Short Answer

Expert verified

Answer section:

  1. Revenue recognises after the delivery of magazines.

  2. Publication is not the sale of the magazine. So, revenue recognise after the subscription.

  3. Revenue is recognised at the time of the delivery to the customers.

Step by step solution

01

Revenue Recognition Principle

Under the Revenue Recognition Principle, the revenue is recognized when the performance obligation is satisfied. The Performance Obligation is said to be met when the ownership in goods are transferred to the buyer at the time of delivery.

02

Revenue recognition in each case given

(a) In case of magazine subscription, the deposit method is used, thus the revenue is not recognized when cash is received it is recognized when the magazine is delivered as the ownership transfers on delivery. As the delivery of the magazine takes place the part of revenue is recognized.

(b) Publication of the magazine does not mean completion of performance obligation. The Published magazine can be said to be goods ready for sale but not yet sold. The revenue should be recognized only when the magazines are delivered to the customers. 80 only portion related to the delivery of the magazine should be recognized as revenue.

(c) Publication and delivery to the customers is the most appropriate way of recognizing the revenue. As the magazines are delivered so is the revenue recognized. Thus, the revenue is recognized as the performance obligation is met.

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Most popular questions from this chapter

Question: (Qualitative Characteristics) Recently, your uncle, Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the 鈥済round floor鈥� of this deal. The bonds being issued by Neville Corp. are 10-year debentures which promise a 40% rate of return. Neville manufactures novelty/party items.

You have told Uncle Carlos that, unless you can take a look at Neville鈥檚 financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Neville鈥檚 most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements, and they are quite impressive. The balance sheet showed a debt-to-equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240.

The financial statements are not shown in comparison with amounts from other years. In addition, no significant note disclosures about inventory valuation, depreciation methods, loan agreements, etc. are available.

Instructions

Write a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor representationally faithful.

(Elements of Financial Statements) Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below.

Assets Distributions to owners Expenses Liabilities Comprehensive Income Gains Equity Revenues Losses Investments by owners

Instructions

Identify the element or elements associated with the 12 items below.(a) Arises from peripheral or incidental transactions.

(b) Obligation to transfer resources arising from a past transaction.

(c) Increases ownership interest.

(d) Declares and pays cash dividends to owners.

(e) Increases in net assets in a period from nonowner sources.

(f) Items characterized by service potential or future economic benefit.

(g) Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.

(h) Arises from income statement activities that constitute the entity鈥檚 ongoing major or central operations.

(i) Residual interest in the assets of the enterprise after deducting its liabilities.

(j) Increases assets during a period through sale of product.

(k) Decreases assets during the period by purchasing the company鈥檚 own stock.(l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

Briefly describe the fair value hierarchy.

Question: What are some of the costs of providing accounting information? What are some of the benefits of accounting information? Describe the cost-benefit factors that should be considered when new accounting standards are being proposed.
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