Question

1. Magic Mountain accounts for revenues using the contract-based approach. It operates a ski resort. Ski Season tickets are sold throughout the year, and entitle the holder to ski any day all season long. They are non-refundable. When should Magic Mountain recognize revenue for the season tickets?

a. at the time of sale

b. on the day the mountain first opens for skiing

c. throughout the ski season

d. at the end of the ski season

2. Frenzo Furniture Co. is a manufacturer of specialty furniture, and uses the contract-based approach for revenue recognition. Because each piece of furniture is custom manufactured, the company requires a contract prior to beginning the production process. Contract terms include a payment of 40% of the estimated cost of the finished piece before production begins. Frenzo Furniture Co. should record the collection as a

a. credit to sales revenue

b. credit to unearned revenue

c. credit to inventory

d. credit to cost of goods sold

Please include a brief explanation for the chosen answer for each question.

Answer 1

1. Revenue recognition is a generally accepted accounting principle (GAAP) that identifies the specific conditions in which revenue is recognized and determines how to account for it.
Under the contract-based revenue recognition principle, the manufacturer would recognize revenue over the life of the contract because the act of constructing the asset satisfies the performance obligation and thus decreases the manufacturer's net contract liability.

Therefore, Magic Mountain recognizes revenue for the season tickets throughout the ski season.
The answer is option c.

2. Under the contract-based revenue recognition principle, the manufacturer would recognize revenue over the life of the contract because the act of constructing the asset satisfies the performance obligation and thus decreases the manufacturer's net contract liability.
Fenzo's Furniture Contract terms include a payment of 40% of the estimated cost of the finished piece before production begins, thus we will record it as debit cash and credit Unearned Revenue because Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered.

Therefore, Frenzo Furniture Co. should record the collection as a credit to unearned revenue.
The answer is option b.