A) In October of year 0, Janine received a $2,500 payment from a client for 25 m

Question

A) In October of year 0, Janine received a $2,500 payment from a client for 25 months of security services she will provide starting on November 1 of year 0. This amounts to $100 per month. What amount of revenue must Janine recognize in year 0 from the $2,500 advance payment for services if she uses the cash method of accounting?

B) In October of year 0, Janine received a $2,500 payment from a client for 25 months of security services she will provide starting on November 1 of year 0. This amounts to $100 per month. What amount of revenue must Janine recognize in year 1 from the $2,500 advance payment for services if she uses the accrual method of accounting?

Explanation / Answer

A) Under the cash method of accounting, Janine must recognize the entire advance received as revenue in the year in which it is received. Thus, in year 0 Janine must recognize the entire $2,500 as revenue.

B) Under the accrual method of accounting, Janine must recognize 12 months revenue in year 1. Thus, of the $2,500 advance payment, she must recognize $100 x 12 months = $1,200 as revenue in year 1.

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