P4-7) For each of the following situations, identify the revenue or expense reco
ID: 2427915 • Letter: P
Question
P4-7) For each of the following situations, identify the revenue or expense recognition methods from the list, and include a brief explanation.
- At point of sale
- At time of delivery (if different from point of sale)
- When cash is received (if different from point of sale)
- At expiration of guarantee of warranty period
- When contract is signed
- Over time
- When service/contract is complete
- According to degree of completion
- According to units of production
a) A vendor sells tomatoes at a farmers' market.
b) A department store sells and delivers a washing machine with a three-year warranty.
c) An electronics store sells a television set with a 14-day "lowest price" guarantee. (That is, if the customer finds a lower price on the same product offered by the company or a competitor, the compny will refund the difference to the customer.)
d) A bus manufacturer signs a contract to supply 280 buses over five years for the Toronto transit system.
e) A university receives a students' course registrations.
f) An insurance company issues a one-year insurance policy on a car.
g) A company deposits funds into a two-year term deposit that earns 4% per year.
h) A company takes a five-year loan bearing interest at 8% per year.
i) A company purchases compters for its accounting department.
j) A company purchases manufacturing equipment that is expected to produce 50,000 widgets.
k) A company incurs delivery on January 3 for a shipment of products sold five days earlier (before the year-end).
Explanation / Answer
a. at the time of sale , as the tomato are type of goods and that too perishable it revenue will be recognised as and when possesion is handed over to the buyer
b. at the time of delivery, as the revenue with regards to the goods is recognized with the risk and reward with regards to the goods have been transfered. however a provision will be created on the basis of past experience of warranty losses.
c. when grantee / warranty period is over. when the guranteed 14 days lowest price period expires then the revenue should be booked.
d. over time , as and when the busses are delivered accordingly the revenue can be booked.
e. over time. as per the duration of the course.
f. when contract is signed.
g. over time, when the interest is accrued then only revenue should be booked.
h. over time, as and when the interest payment becomes due.
I. overtime, computers will be depriciated.
j. according to unit of production, as the no. of units produced the machine will be depriciated in the same ratio.
k. at the time of delivery, becase the risk and reward related to the good it transfered on 3 january only.
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