Revenues ($14,350 + $150 + $136) $ 14,636
Small equipment 622
Van rent [$100 x 4.5 months] 450
Trailer rent 600
Fuel and maintenance 739*
Telephone [$100 x 2 x 4.5] 900 3,331
Net earnings $ 11,305
The most appropriate recognition method would be time of
delivery, which is when they finish the particular landscaping job.
As each job is likely to be very short in duration, the percentage
of completion method would not be necessary as the risk and
reward will have transferred to the buyer (for the landscaping
services rendered), the costs will be known and the economic
benefits (cash received or accounts receivable) will have passed
to the seller.
* These amounts might have to be adjusted to reflect supplies
still on hand, unpaid bills, etc.
There is no cost of goods sold account because the company is
providing services rather than selling physical goods (such as
Other expenses might include rent, salaries and wages, sales
commissions, depreciation of any fixed assets purchased, and
Warm as Toast Company
Income Statement For the Year Ending December 31, 2011
Sales ($835,000 – $76,000) $759,000
Cost of Goods Sold ($407,000 + $198,000*) (605,000)
Gross Profit $154,000
Warranty expense 46,000
Net earnings $108,000
* Alternatively, the labour cost could be reported as a separate item,
following the gross profit figure.
Other expenses that might be incurred include advertising, sales
commissions, rent, depreciation, office supplies, wages for the office
staff, and utilities.
4-23 The store should account for the gift card as unearned revenue
(deferred revenue). The store has not yet fulfilled all the
necessary criteria to recognize the revenue, and thus must defer
the revenue until they do fulfill all the revenue recognition
criteria. For instance, the store has not yet sold any goods and
has not yet transferred the risks and rewards of to the buyer.
Further, the company must still manage or control the goods
since they have not yet sold them. In essence, the customer has
just put down a deposit on some goods that will be purchased in
the future. The revenue can be measured as cash is exchanged
at the point of sale, thus, this criteria item has been met. As a
cash exchange has taken place and the store has the customers
money in the form of a gift card (or a customer deposit), a
portion of the economic benefits from the transaction are flowing
to the seller (the seller received some cash, but