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BUS 251 (83)


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Business Administration
BUS 251
Steve Gibson

4-17 Revenues ($14,350 + $150 + $136) $ 14,636 Expenses: Small equipment 622 Van rent [$100 x 4.5 months] 450 Trailer rent 600 Fuel and maintenance 739* Supplies 20* 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 inventory). Other expenses might include rent, salaries and wages, sales commissions, depreciation of any fixed assets purchased, and advertising. 4-19 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
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