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Chapter 2: Q22Q (page 61)

Selane Eatery operates a catering service specializing in business luncheons for large corporations. Selane requires customers to place their orders 2 weeks in advance of the scheduled events. Selane bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Selane recognize revenue related to its catering service

Short Answer

Expert verified

Selane recognizes revenue from catering services provided by the Selane eatery.

Step by step solution

01

Meaning of Revenue Recognition

Revenue recognition refers to the criteria that are required to be fulfilled before recording revenue in books of accounts. It is extracted from the sale of goods and the performance of service.

02

Appropriateness of Controller advice

Revenue is recognized by the seller or service provider when the seller or service provider meets performance obligations. Selane Eatery will meet performance obligations when it delivers luncheons to its customers; therefore, Selane Eatery recognizes revenue on the date on which delivery of luncheons is made and not on the date of billing or date receiving payment from customers.

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Most popular questions from this chapter

ETHICS (Expense Recognition Principle) Anderson Nuclear Power Plant will be "mothballed" at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be recognized as assets are used up or liabilities are incurred. Accountants Ana Alicia and Ed Bradley argue whether it is better to allocate the expense of mothballing over the next 20 years or ignore it until mothballing occurs.

Instructions

Answer the following questions.

(a) What stakeholders should be considered?

(b) What ethical issue, if any, underlies the dispute?

(c) What alternatives should be considered?

(d) Assess the consequences of the alternatives.

(e) What decision would you recommend?

E2-7 (L05,6) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time.

Instructions

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)

  1. Fair value changes are not recognized in the accounting records.
  2. Financial information is presented so that investors will not be misled.
  3. Intangible assets are amortized over periods benefited.
  4. Agricultural companies use fair value for purposes of valuing crops.
  5. Each enterprise is kept as a unit distinct from its owner or owners.
  6. All significant post-balance-sheet events are disclosed.
  7. Revenue is recorded when the product is delivered.
  8. All important aspects of bond indentures are presented in financial statements.
  9. Rationale for accrual accounting.
  10. The use of consolidated statements is justified.
  11. Reporting must be done at defined time intervals.
  12. An allowance for doubtful accounts is established.
  13. Goodwill is recorded only at time of purchase.
  14. A company charges its sales commission costs to expense

Question: William Murray achieved one of his life-long dreams by opening his own business, The Caddie Shack Driving Range, on May 1, 2017. He invested \(20,000 of his own savings in the business. He paid \)6,000 cash to have a small building constructed to house the operations and spent \(800 on golf clubs, golf balls, and yardage signs. Murray leased 4 acres of land for \)1,000 per month. (He paid the first month’s rent in cash.) During the first month, advertising costs totaled \(750, of which \)150 was unpaid at the end of the month. Murray paid his three nephews \(400 for retrieving golf balls. He deposited in the company’s bank account all revenues from customers (\)4,700). On May 15, Murray withdrew \(800 in cash for personal use. On May 31, the company received a utility bill for \)100 but did not immediately pay it. On May 31, the balance in the company bank account was \(15,100.

Murray is feeling pretty good about results for the first month, but his estimate of profitability ranges from a loss of \)4,900 to a profit of \(1,650.

Accounting

Prepare a balance sheet at May 31, 2017. Murray appropriately records any depreciation expense on a quarterly basis. How could Murray have determined that the business operated at a profit of \)1,650? How could Murray conclude that the business operated at a loss of \(4,900?

Analysis

Assume Murray has asked you to become a partner in his business. Under the partnership agreement, after paying him \)10,000, you would share equally in all future profits. Which of the two income measures above would be more useful in deciding whether to become a partner? Explain.

Principles

What is income according to GAAP? What concepts do the differences in the three income measures for The Caddie Shack Driving Range illustrate?

Revenues, gains, and investments by owners are all increasing in net assets. What are the distinctions among them?

BE2-1 (L03) Match the qualitative characteristics below with the following statements. 1. Relevance 5. Comparability 2. Faithful representation 6. Completeness 3. Predictive value 7. Neutrality 4. Confirmatory value 8. Timeliness (a) Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena. (b) Having information available to users before it loses its capacity to influence decisions. (c) Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future. (d) Information that is capable of making a difference in the decisions of users in their capacity as capital providers. (e) Absence of bias intended to attain a predetermined result or to induce a particular behavior.
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