Question

Riff Hopital recently treated an accident victim in the emergency room. Because the patient was unconcious when he arrived, Riff treated the patient without knowing whether he had insurance or, if he did, whether it was with an insurer with which Riff has a preferred provider agreement in place.

The standard cost for the services Riff provided was $25,000. Riff discounts emergency room services by 70% for patients whose insurers have preferred-provider agreements with Riff.

For each of the following independent scenarios, determine the amount of revenue Riff should report and the point in time when revenue may be recognized.

1. When the patient is able to communicate, it is determined the patient has insurance and Riff is one of the insurer's preferred providers.

2. When the patient is able to communicate, it is determined the patients has insurance, but Riff is not one of the insurer's preferred providers. In such cases, insurers will typically claim the hospital's charges are above the usual and customary charge for the services provided and refuse to pay the entire bill. Riff believes there is an 80% chance it will be able to negotiate a 50% discount with the insurer and a 20% chance it will negotiate a 60% discount with the insurer.

3. When the patient is able to communicate, it is determined the patient has insurance, but not with an insurer that has a preferred-provider agreement with Riff. In such cases, insurers will typically claim the hospitals charges are above the usual and customary charge for the services provided and refuse to pay the entire bill. Riff believes there is a 50% cance it will be able to negotiate a 50% discount with the insurer, and a 20% chance it will negotiate a 65% discount with the insurer.

4. When the patient is able to communicate, it is determined the patient has no insurance. Riff agrees with the patient to discount the bill by 90%.

Answer 1

As the Riff hospital already treated the accident victim in emergency room the service is already rendered.

According to principle, revenue are recognised when they are realized or realizable and are earned(usually when services are rendered) no matter when cash is received.

For revenue recognition following criteria must be met :

- persuasive evidence of arrangement must exist

- Services been rendered

- The service provider price to the recipient must be fixed or determinable

Answers to the parts are as follows:

1. Since in this case insurer are preferred one and all criteria are met for revenue recognition, the revenue should be recognised when patient able to communicate.

Amount of revenue is $ 7,500 ($ 25,000×30%)

2. Amount of revenue is $ 13,000 ($25000×50% × 80% + $ 25,000×60% ×20%)

Revenue shoold be recognised when final negotiation will be done as amount is not fixed or determinable as one of the criteria for revenue recognition.

3. In this case given that chance of 50% is that for 50% negotiation but here chance should be 80% for 50% negotiation. We providing here solutions for both the chanses

Amount of revenue

- For chances of 50% and 20% which is unrealistic

$ 3312.5 ($ 25000×50% ×50% + $ 25000×35%×20%)

For chances of 80% and 20%

$ 11750 ($ 25000×50%×80% + $ 25000×35%×20%)

Revenue should be recognised when final negotiation will be done as amount is not certain or determinable as one of the criteria for revenue recognition.

4. Amount of revenue $ 2500 ($ 25000×10%)

Revenue should be recognised when patient able to communicate and negotiation is fixed for 90% discount.