Question

For each of the following independent situations, answer the specific revenue concerns (provide authoritative support where appropriate).

1)        Company A enters into a contract on February 1, 2018 to manage rental property for Company B for the next 5 years. Company A will provide all services related to the management of the property and will receive a monthly payment equal to 2% of the gross rentals from the property. Historically, property of this type in this area has averaged an 85% occupancy rate. How should Company A determine the amount and timing of revenue recognition under this contract?

2)        Company A is constructing a high-rise luxury apartment building. The building will contain 80 apartments of similar size and layout. During 2018, Company A receives a deposit of $100,000 from a customer for one of the apartments. The deposit is only refundable if Company A fails to complete the building. Company A expects completion early in 2019. The remainder of the apartment’s sale price ($900,000) is due from the customer at the completion of the building when the customer can take possession. Can Company A recognize revenue in 2018 related to the contract with the customer paying the deposit?

3)        Bakery A has an incentive plan that gives its customers one point for each doughnut purchased. A customer that has accumulated 15 points can receive a free doughnut. During the current year, Bakery A sold 201,600 doughnuts at $1.20 each. Bakery A expects 90% of the points to be redeemed and 105,000 were redeemed in the current year. How much revenue should Bakery A recognize in the current year related to the sale of the doughnuts and the incentive plan?

Answer 1

a. Company A can recognize its revenue motnhly on the basis of occupany rate * Rental Value * 2 % . As historically its average occupany rate is 85 % , so as per accounting rules company can recognize revenue on the basis of this criteria and also it doesn't violate accrual principle .

b. No, Company A cannot recognize revenue in 2018 related to the contract with the customer paying the deposit.

Because there is uncertainity regarding revenue collection and completion of apartment building . As company has to refund the deposit f company fails to make the delivery on time . As per accounting rules when revenue is not virtually certain and there is uncertainity regarding its ultimate collection , it is not to be recognised until there is reasonable certainity .

However there is another solution possible , if company has good past record of completing the construction then company can recognise revenue on that basis as there is reasonable certainity on the basis of past performance .

c. Revenue to be reconized related to sale of doughnuts

= 1.20 * 201600 = 241920  

Since 105000 points were redeemed and for 15 points one doughnut to be given free , therefore 105000/15 = 7000 doughnuts are given free in current year . revenue in respect of incentive plan is for 7000 doughnuts.