Question

In: Accounting

Santa's Christmas Tree Farm, a private company reporting under ASPE, grows pine, fir, and spruce trees....

Santa's Christmas Tree Farm, a private company reporting under ASPE, grows pine, fir, and spruce trees. The company cuts and sells the trees for cash during the Christmas season. Most of the trees are exported to the United States. The remaining trees are sold to local tree lot operators.

It normally takes about 12 years for a tree to grow to a good size. The average selling price for a mature tree is $48. The owner of Santa's Christmas Tree Farm believes that the company should recognize revenue at the rate of $4 a year ($48/12 years) for each tree that it cuts. The biggest cost of this business is the cost of fertilizing, pruning, and maintaining the trees over the 12-year period. These costs average $40 a tree and the owner believes they should also be spread over the 12-year period.

Do you agree with the proposed revenue recognition policy for Santa's Christmas Tree Farm? Explain why or why not. Use the revenue recognition criteria to explain your argument for when the revenue should be recognized for this tree-farming business. Also, explain how the costs of fertilizing, pruning, and maintaining the trees should be recorded.

Solutions

Expert Solution

ANSWER :-

A) Disagree,

with Revenue recognition policy for Santa's Christmas Tree Farm  

B) Arguments :-

a) Criteria for Revenue Recognition for Tree farming business :-

- Risk and Rewards of ownership transferred to buyer by seller

- Seller does not have any rights on goods sold

- Sales Revenue collection is reasonably assured

- Revenue is measured accurately

- Cost of revenue is measured reasonably

b) In above problem,

1) It takes 12 years to grow into good size for tree , thereafter sales for a average selling price of $ 48.  Hence Company's policy to recognise $ 4 per year for 12 years not valid .

2) Revenue recognised in the year of sale i.e. @ 12 th year for $ 48 based on satisfying above revenue recognition criteria .

3) Therefore, Santa's Christmas Tree Farm revenue recognition policy of recognise revenue @ $ 4 per year for 12 years not valid .  

C) Costs of fertilizing , pruning and maintaining trees of $ 40 a tree recorded and spread for 12 years period

= $ 40   

12 years

= $ 3.33 ( approx.)  per year

Cost of fertilizing , pruning and maintaining trees is recorded @ $ 3.33 ( approx.) per year

ekkarill92 answered 1 year ago
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