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Chapter 18: Question 6Q (page 1031)

When is revenue recognized in the following situations? (a) Revenue from selling products, (b) revenue from services performed, (c) revenue from permitting others to use company assets, and (d) revenue from disposing of assets other than products.

Short Answer

Expert verified
  1. When the seller has transferred the ownership of the product to the buyer
  2. When services have been performed by the company
  3. When interest, rent, etc., are received in return for assets used by others.
  4. At the date of sale, revenue is recognized.

Step by step solution

01

Definition of Revenue Recognition

According to the revenue recognition principle, revenue is recognized when goods are exchanged for some consideration (amount) or when services are performed and receive some amount/cash in return.

02

Revenue recognized in the following situations

According to the revenue recognition concept, revenue is recognized in the following situations as follows:

  1. Revenue from selling products: Under this situation, revenue is recognized when the seller transfers the ownership rights of the product to the buyer. When the seller sells the product to the buyer and receives a considerable amount in return.
  2. Revenue from services performed: Under this situation, revenue is recognized when services are rendered to the customer or services performed and receive some considerable amount in return.
  3. Revenue from permitting others to use company assets: Under this situation, revenue is recognized when the company receives some amount as rent, royalty fee, interest, etc.,from others to use the company’s assets.
  4. Revenue from disposing of assets other than products: Under this situation, revenue is recognized at the time or the date of sale of the assets.

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Most popular questions from this chapter

Describe the conditions when contract assets and liabilities are recognized and presented in financial statements.

Turner, Inc. began work on a \(7,000,000 contract in 2017 to construct an office building. During 2017, Turner, Inc. incurred costs of \)1,700,000, billed its customers for \(1,200,000, and collected \)960,000. At December 31, 2017, the estimated additional costs to complete the project total $3,300,000. Prepare Turner’s 2017 journal entries using the percentage-of-completion method.

On May 3, 2017, Eisler Company consigned 80 freezers, costing \(500 each, to Remmers Company. The cost of shipping the freezers amounted to \)840 and was paid by Eisler Company. On December 30, 2017, a report was received from the consignee, indicating that 40 freezers had been sold for \(750 each. Remittance was made by the consignee for the amount due after deducting a commission of 6%, advertising of \)200, and total installation costs of $320 on the freezers sold.

Instructions

(a) Compute the inventory value of the units unsold in the hands of the consignee.

(b) Compute the profit for the consignor for the units sold.

(c) Compute the amount of cash that will be remitted by the consignee.

Presented below are three revenue recognition situations.

(a) Groupo sells goods to MTN for \(1,000,000, payment due at delivery.

(b) Groupo sells goods on account to Grifols for \)800,000, payment due in 30 days.

(c) Groupo sells goods to Magnus for \(500,000, payment due in two installments, the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is \)464,000.

Indicate the transaction price for each of these situations and when revenue will be recognized.

Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Organic Growth estimates returns of 20%. Organic Growth sells these seeds on account for \(1,500,000 (cost \)750,000) on January 2, 2017. Customers are required to pay the full amount due by March 15, 2017.

Instructions

(a) Prepare the journal entry for Organic Growth at January 2, 2017.

(b) Assume that one customer returns the seeds on March 1, 2017, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased \(100,000 of seeds from Organic Growth.

(c) Assume Organic Growth prepares financial statements quarterly. Prepare the necessary entries (if any) to adjust Organic Growth’s financial results for the above transactions on March 31, 2017, assuming remaining expected returns of \)200,000.
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