Revenue-Problem Set 07

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Babson College *

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Accounting

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Apr 3, 2024

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docx

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Problem 1: Revenue Recognition The following are transactions that took place at a coffee shop during the month August. a. Customers purchased and paid cash for coffee and pastries totaling $5,000. b. Customers purchased $900 in gift cards. c. Several corporate customers had breakfast events in which the coffee shop provided the coffee and food for a price of $2,000. The corporate customers put these amounts on account and will pay in September. d. Corporate customers who had breakfast events in July paid the coffee shop $700 in August. e. Customers purchased coffee and pastries using gift cards in the amount of $200. Required: Based upon the information above, how much revenue should be recognized in August? Problem 2: Revenue and Expense Recognition During September, Alexander Company under- took the following transactions on the dates specified: Sept. 1 Paid $800 for insurance for the next four months. Sept. 1 Borrowed $6,000 from the local bank at an annual rate of 3%. The loan and interest will be repaid in one year (on Sept. 1 of next year). Sept. 1 Purchased equipment for $12,000 cash. The estimated useful life of the equipment is 10 years. Sept. 2 Purchased inventory from suppliers for $7,500 on account. Sept. 2 Paid employees $2,200 for their August salaries. Sept. 5 Sold goods to customers for $9,600 on account. The cost of the goods to Alexander was $4,200. Sept. 8 Received an order from a customer for $550 of goods that will be delivered in October. Sept. 15 Paid suppliers $7,500 cash for goods purchased on the 2nd. Sept. 26 Collected $9,600 from customers for goods sold on the 5th. Sept. 26 Sold goods to customers for $1,000 cash. The cost of the goods to Alexander was $690. Sept. 29 Collected $470 cash from a customer for goods that will be delivered in October. Sept. 30 Employees earned $5,240 during September, which Alexander will pay in October. Required: Prepare a simple income statement for the month of September.

Problem 3: Revenue or Expense? Consider separately each event below, and indicate by an “X” whether the company should recognize revenue or expense in an income statement for the month of September 2022 (do not mark either box if no revenue or expense). September Revenue September Expense “X” = Yes Blank = No Nike, Inc. purchased TV advertising in August 2022. All of its ads aired in September 2022. Apple, Inc. collects cash in September 2022 for an iTunes gift card. The gift card is redeemed for music in October 2022 and November 2022. The Boston Globe newspaper runs ads in September 2022 that were purchased by customers in August 2022 and will be paid for in October 2022. CVS (a drug store) paid its September 2022 rent in August 2022 and occupied the premises for the full month of September. Roche Pharmaceuticals receives an order from a customer in June 2022. It manufactured and delivered the products in August 2022 and collected cash from the customer in September 2022. Employees of the Boston Beer company have earned wages for work performed in September 2022 but the company will not pay them until the next pay period in October 2022. The Wall Street Journal delivers newspapers in September 2022 to customers who paid for their annual subscriptions in January 2022. Liberty Mutual Insurance Company purchased a computer system in January 2022 that was paid for and properly recorded in that month. Problem 4: Business Model Revenue Recognition Timing Required: Consider the following business descriptions and determine when revenue should be recognized by the bolded company. 1. A restaurant, such as Chipotle’s, sells food, beverages and gift cards which are paid for by the customers with cash or credit card. 2. A grocery store, such as Whole Foods, sells food and related products. Whole Foods offers discounts that allow the customer to obtain a lower price on certain items 3. A magazine publisher, such as Sports Illustrated, sells a year’s subscription to one of its monthly magazines. The cash is paid in advance for the subscription. 4. An on-line and store front retailer, such as Apple, sells an iPhone or iPad to consumers. The sale of these products includes the hardware, the software and the “free” right to obtain certain future software upgrades. 5. A retail store, such as Tiffany’s, displays merchandise; customers select items, pay with credit cards or cash, and take items. Customers are given 30 days to return items.

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