You have recently been hired as the assistant controller for Stanton Corporation

Question

You have recently been hired as the assistant controller for Stanton Corporation, which rents building space in major metropolitan areas. Customers are required to pay six months of rent in advance. At the end of 2016, the company's president notices that net income has fallen $50,000 compared to last year. This concerns the president for two reasons. First, the year-end bonus for the employees is tied directly to net income. Second, shareholders may see a decline in profitability as a weakness in the company and begin to sell their stock.

After close inspection of the financial statements, the president notices that the balance of the Unearned Revenue account is $120,000. The president comes to you, the company's accountant, and suggests that the firm should recognize as revenue in 2016 the $120,000 received in advance from customers for rent to be provided in 2017. The president offers the following explanation: “First, we have received these customers' cash by the end of 2016, so there is no question about their ability to pay. Second, we have a history of fulfilling our obligation to these customers. We earned that money when we got them to sign the six-month contract.”

Required: Draft a one-page response in the form of a business memo to your manager discussing your recommendation on the President’s suggestion to recognize the $120,000 as revenue in 2016. Support your decision with addressing the accounting issue, the parties affected and what factors you considered to make your decision.Your memo will be graded based on the written communication, critical thinking and ethics rubrics.

Explanation / Answer

in accounting pratice the income is booked when the services has been provided or in process of being provided. So, as per accounting standards the income on renting of space can only be booked when the client has actually used the space or is currently using the space.

So, the advance received can only be booked as revenue when the services has actually been consumed by the client. As and when the client uses the service Stanton Corporation can transfer the amount of unearned revenue to sale account.

hence the proposal given by the president of Stanton Corporation is incorrect and the advance amount of $120000 cannot be booked as income.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.