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Curriculum Center Browse Bibliography Build EPacket Pricing Structure Distribution Process Management Control in Nonprofit Organizations
 
Joanne Gotsinas (A)
Author(s):
Anthony, Robert N.
Functional Area(s):
   Financial Accounting
Setting(s):
   For Profit
Difficulty Level: Intermediate
Pages: 3
Teaching Note: Available. 
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First Page and the Assignment Questions:
Your course unfortunately doesn’t give me the answers to a great many real-life problems. I’ve read the text and listened to you attentively, but every once in a while I seem to run across something that doesn’t seem to fit the rules.

Joanne Gotsinas was discussing some of her frustrations with her accounting professor. The professor’s reply was not especially encouraging:

Not all of life’s complications can be covered in a first course. As is the case with law, medicine, or indeed any of the professions, many matters are dealt with in advanced courses, and others are not settled in any classroom. Nevertheless, some problems that are not specifically discussed can be solved satisfactorily by relating them to principles that you already have learned. Let’s take revenue recognition as a particularly difficult case in point. If you will write down some of the matters about which you are now uncomfortable, I’d be glad to discuss them with you—that is, after you have given some thought as to the most reasonable solution.

A week later, Ms. Gotsinas returned with the list given below.

  1. Electric Utility Bills. When an electric utility customer uses electricity, the electric company has earned revenues. It is obviously impossible, however, for the company to read all of its customers’ meters on the evening of December 31. How does the electric company know its revenue for a given year? Explain.
  2. Retainer Fee. A law firm received a “retainer” of $10,000 on July 1,2004, from a client. In return, it agreed to furnish general legal advice upon request for one year. In addition, the client would be billed for regular legal services such as representation in litigation. There was no way of knowing how often, or when, the client would request advice, and it was quite possible that no such advice would be requested. How much of the $10,000 should be counted as revenue in 2004? Why?
  3. Cruise. Raymond’s, a travel agency, chartered a cruise ship for two weeks beginning January 23, 2005, for $200,000. In return, the ship’s owner agreed to pay all costs of the cruise. In 2004, Raymond’s sold all available space on the ship for $260,000. It incurred $40,000 in selling and other costs in doing so. All the $260,000 was received in cash from passengers in 2004. Raymond’s paid $50,000 as an advance payment to the ship owner in 2004. How much, if any, of the $260,000 was revenue to Raymond’s in 2004? Why? Does the question of whether passengers were entitled to a refund in 2005 if they canceled their reservations make any difference in the answer? Why?
  4. Accretion. A nursery owner had one plot of land containing Christmas trees that were four years old on November 1, 2004. The owner had incurred costs of $3 per tree up to that time. A wholesaler offered to buy the trees for $4 each and to pay in addition all costs of cutting and bundling, and transporting them to market. The nursery owner declined this offer, deciding that it would be more profitable to let the trees grow for one more year. Only a trivial amount of additional cost would be involved. The price of Christmas trees varies with their height. Should the nursery owner recognize any revenue from these trees in 2004? Why? . . .

Assignment

  1. Give your “tentative answers” to each of the above issues. Illustrate the issue and your answer, whenever possible, with a numerical example.