Question

For each situation indicate when a company should recognize revenue:

	Situation	Recognition of Revenue
a.	On June 2, 2017, a customer books travel on an airline, paying $500 for a round-trip ticket that departs July 15, 2017, and returns July 20, 2017. In addition, once the round-trip ticket is used, the airline credits the passenger's frequent-flier account for 500 miles. The airline determines that each frequent-flier point has a value of $0.01.
b.	On May 1, 2017, a retailer enters into a contract with a construction company. The construction company will build a new warehouse for the retailer at a price of $2 million. The retailer will make four equal payments to the construction company over the 1-year construction period, starting on May 1, 2017, and then every 4 months. The retailer can cancel construction at any time and will own any construction to date; however, it must pay the construction company for work done up to the cancellation date. The building is completed on April 30, 2017.
c.	Morning Donut agrees to supply donuts and coffee on a daily basis to a local business. The contract starts on January 1, 2017, and runs for 1 year. Morning Donut charges $400 per week for the donuts and coffee.
d.	The Raleigh Knights sell four season tickets to a customer. The Knights play 10 regular season games, and the cost of one season ticket is $250.

Answer 1

Revenue is recognized only when it is earned i.e. the customer received the service or product for which they have paid or will pay in future.

a)

Since customer has booked the ticket only but not completed the trip,

hence the revenue has not been earned and hence cannot be recognized.

b)

Since the building has been completed, therefore the revenue has been earned

hence the revenue can be recognized.

c)

Since there is no transaction i.e. supply of donut actually happened,

therefore revenue cannot be recognized.

d)

Since season games is yet to be played, therefore customer has not received the service.

Hence revenue cannot be recognized.