For each of the following independent situations, answer the specific revenue co

Question

For each of the following independent situations, answer the specific revenue concerns (provide authoritative support where appropriate). Use new revenue recognition, ASC 606.

1)        Company A enters into a contract on February 1, 2018 to manage rental property for Company B for the next 5 years. Company A will provide all services related to the management of the property and will receive a monthly payment equal to 2% of the gross rentals from the property. Historically, property of this type in this area has averaged an 85% occupancy rate. How should Company A determine the amount and timing of revenue recognition under this contract?

2)        Company A is constructing a high-rise luxury apartment building. The building will contain 80 apartments of similar size and layout. During 2018, Company A receives a deposit of $100,000 from a customer for one of the apartments. The deposit is only refundable if Company A fails to complete the building. Company A expects completion early in 2019. The remainder of the apartment’s sale price ($900,000) is due from the customer at the completion of the building when the customer can take possession. Can Company A recognize revenue in 2018 related to the contract with the customer paying the deposit?

3)        Bakery A has an incentive plan that gives its customers one point for each doughnut purchased. A customer that has accumulated 15 points can receive a free doughnut. During the current year, Bakery A sold 201,600 doughnuts at $1.20 each. Bakery A expects 90% of the points to be redeemed and 10,500 were redeemed in the current year. How much revenue should Bakery A recognize in the current year related to the sale of the doughnuts and the incentive plan?

Explanation / Answer

1. Company A should recognize the 2% of the monthly rental as income. However, a provision for 15% of rental income recognized in each month, should be made simulatneously. The income shall be recognized at the end of each month.

2. The deposit is refundable if Company A fails to complete the building. Company A expects completion early in 2019. Since the deposit is refundable if comapny fails to complete the building in early 2019, the company can not recognize the revenue of Deposit of $100,000 in 2018 as the Deposit is not certain in 2018.

3. Revenue to be recognized in current year by the Bakery: 201,600 x $1.20 = $241,920

Expenses related to incentive:

Total points awarded = 201,600

Points eligible for free doughnuts = 201600/15 = 13,440

Points expected to be redeemed = 13,440 x 90% = 12,096

Points redeemed = 10,550

Revenue loss of doughnuts redeemend for free = 10,550 x 1.2 = 12,660

Therefore, net revenue to be recognized = $241,920 - $ 12,660 = $229,260

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