Question

For each of the following independent situations, answer the specific revenue concerns (provide authoritative support where appropriate). Use new revenue recognition, ASC 606.

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 10,500 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

1. Company A should recognize the 2% of the monthly rental as income. However, a provision for 15% of rental income recognized in each month, should be made simulatneously. The income shall be recognized at the end of each month.

2. The deposit is refundable if Company A fails to complete the building. Company A expects completion early in 2019. Since the deposit is refundable if comapny fails to complete the building in early 2019, the company can not recognize the revenue of Deposit of $100,000 in 2018 as the Deposit is not certain in 2018.

3. Revenue to be recognized in current year by the Bakery: 201,600 x $1.20 = $241,920

Expenses related to incentive:

Total points awarded = 201,600

Points eligible for free doughnuts = 201600/15 = 13,440

Points expected to be redeemed = 13,440 x 90% = 12,096

Points redeemed = 10,550

Revenue loss of doughnuts redeemend for free = 10,550 x 1.2 = 12,660

Therefore, net revenue to be recognized = $241,920 - $ 12,660 = $229,260