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

Case 1

Company A is entitled to receive a monthly payment from company B to manage its property at the rate of 2 percent of gross rental from the property. Revenue should be recognized when it is certain to be recognized, so company A should recognize revenue at the month end from company B at the rate of 2 percent on accrued gross rental revenue. This figure can be measured without any error because occupancy of property and property tariff are past and measurable event on month end, So company A can recognize its revenue at the month end on the basis of 2 percent of gross accrued rent revenue from the property. If any accrued rent not realized by company B in future it will not be a problem for company A because contract does not provide for any effect of rent solvency on company A ‘s revenue.

Case 2

Company A is received a Advance deposit of $ 100000 from a customer for a flat in a building to be construct by the company consist of 80 similar flats in year 2018. Remaining amount would be receivable by the company A when the building complete and company estimates that the construction of the building will be completed by 2019. So completion of building construction in not certain in 2018 and by chance the deposit received by the customer of $ 100000 could be refundable if the company could not complete the project by any reason, so the company initially recognize the advance from customer of $100000 as Advance from customer and should recognize this amount as revenue in 2019 when the building will be completed and the remaining amount from the customer of $900000 would be receivable.

Case 3

Bakery A Sold 201600 doughnuts in current year at $1.20 each it will work out in total revenue of $ 241920 from sale of doughnuts in current year by the bakery A. So by applying the concept of certainty of revenue the bakery A should recognize revenue from the sale of doughnuts in current year as $241920.

And revenue for incentive plan the bakery A have distributed total 201600 point in current year. As per bakery estimates 90 percent of it will be redeemed so total 181440 point will be redeemed that will be 12096 doughnuts and in current year 105000 point redeemed that will be 7000 doughnuts. So bakery A should make a provision for the cost of 12096 doughnuts and should adjust cost of 7000 doughnuts during the year and should carry the balance of this provision to the next year in balance sheet. So incentive plan is a expenditure and so there is no need to recognize revenue from this although bakery A should provide for this liability by making a provision for cost of doughnuts to be give free under incentive plan.