AFA 100 Lecture Notes - Lecture 10: Deferred Income, Return Period

69 views5 pages

ochregnat479

27 Jul 2017

School

Ryerson University

Department

Accounting

Course

AFA 100

Professor

Jason Chin- Tiong Chan

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

No service has been performed, because no classes have been provided, therefore revenue cannot be recognized. Performance is measurable, because classes have been provided to the workers of the law firm. It does not matter whether they have attended the classes or not, as long as the classes have been running. There is no indication that collection will be a problem. In addition, the law firm is local so it is reasonable to assume that the owners of the gym know them. Finally, a down payment of ,000 was made, which indicates the law firm is committed to the program for their employees. Costs are measurable, because once the class is run the gym will know the costs to run the class. All costs of running the business should be known at the end of a month. Also, there is no indication the fitness centre is a newly opened business, therefore they should be aware of their operating costs.

Related Questions

10 Which of the following criteria is not a condition for the revenue recognition principle? a. The accounting entity receives the customer's payment in cash before revenue can be recognized b. The accounting entity has performed or substantially performed by providing goods or services to the customer c. In exchange for the accounting entity's performance the customer has promised to pay in cash or in a form and an amount that is measurable d. Where the accounting entity has received a promise to pay from its customer, collection is reasonably assured e. None of the above The correct answer is 'a'.

Melaney Parks purchased HealthPlus Fitness in January, 2011. Melaney wanted to increase he size of the business by selling three-year memberships for $3,000, payable at the beginning of the membership period. The normal yearly membership fee is $1,500. Since few prospective members were expected to want to spend $3,000 at the beginning of the membership period, Melaney arranged for a local bank to provide a $3,000 instalment loan to prospective members. By the end of 2011, 250 customers had purchased the three-year memberships using the loan provided by the bank.

Melaney prepared her income statement for 2011 and included $750,000 ($3,000*250 members) as revenue because the club had collected the entire amount in cash. Melaney's account objected to the inclusion of the entire $750,000. The accountant argued that the $750,000 should be recognized as revenue as the club provides services for these members during the membershipperiod. Melaney countered with a quotation from generally accepted accounting principlies:

Profit s deemed to be realized when sale in the ordinary course of business is effected, unless the circumstances are such that collection of the sale price is not reasonably assured.

Melaney notes that memberships have been sold and the collection of the selling price as occured. Therefore, she argues that all $750,000 is revenue in 2011.

Required:

1. Write a short memo o Melaney stating the proper accounting postion for recognition of the revenue in this situation.

2. If the $3,000 fee were nonrefundable, would your response to Melaney change? If so, why?

I. True/False 2 points

Indicate whether the sentence or statement is true or false.

____ 1. Revenues and gains are generally recognized when they are realized or realizable and they have been earned through substantial completion of the activities involved in the earnings process.

____ 2. The proportional performance method has been developed to reflect revenue earned on service contracts under which many acts of service are to be performed before the contract is completed.

____ 3. Beginning with the Tax Reform Act of 1986, the tax laws eliminated the use of the completed-contract method.

____ 4. The most popular input measure under percentage-of-completion accounting is the cost-to-cost method.

____ 5. Estimates of architects and engineers of percentage-of-completion are not acceptable under generally accepted accounting principles.

____ 6. At the conclusion of a construction contract, the balance in Construction in Progress will be exactly equal to the amount in Progress Billings on Construction Contracts when using the percentage-of-completion method.

____ 7. If analysis of construction contracts indicates that there will be an overall loss on the contract, the loss should immediately be recognized in full under the completed-contract method and the percentage-of-completion method.

____ 8. Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is recovered through cash receipts with all subsequent receipts reported as revenues.

____ 9. The cost recovery method is the most conservative revenue recognition method.

____ 10. If a company is heavily involved in installment sales, the operating cycle of the business is normally defined as the average period of the installment contracts.

magentamink378

AFA 100 Lecture Notes - Lecture 10: Deferred Income, Return Period

Document Summary

Get access

Related Documents

AFA 100 Lecture Notes - Lecture 5: Seneca College, Washing Machine, Costco

AFA 100 Lecture Notes - Lecture 4: Seneca College, Washing Machine, Costco

AFA 100 Midterm: AFA 100 Review Package Revenue Recognition - using Matrix

Related Questions