Real World Case 5-1
A bill and hold strategy accelerates the recognition of revenue. In this case, sales that would normally have occurred in 1998 were recorded in 1997. Assuming a positive gross profit on these sales, earnings in 1997 is inflated.
A customer would probably not be expected to pay for goods purchased using this bill and hold strategy until the goods were actually received. Receivables would therefore increase.
Sales that would normally have been recorded in 1998 were recorded in 1997. This bill and hold strategy shifted sales revenue and therefore earnings from 1998 to 1997.
Earnings quality refers to the ability of reported earnings (income) to…show more content…
Usually, these remaining uncertainties can be accounted for by estimating and recording allowances for anticipated returns and bad debts, thus allowing revenue and related costs to be recognized at point of delivery. But occasionally, an abnormal degree of uncertainty causes point of delivery revenue recognition not to be appropriate. Revenue recognition after delivery sometimes is appropriate for installment sales and when a right of return exists.
Judgment Case 5-3
Mega should recognize revenue for the initial fee equally over the estimated average period members will continue to be members. Even though the fee is nonrefundable, it is not “earned” until services are provided. Since there is no contractual period of service, it must be estimated. Mega would be justified in recognizing only $3 of the initial fee immediately to offset the cost of the membership card. The payment option chosen by members does not affect the revenue recognition policy.
The monthly fee should be recognized as revenue upon billing, as long as adequate provision is made for possible uncollectible amounts.
Judgment Case 5-4
The revenue recognition policy is questionable. The liberal trade-in policy causes gross profit to be overstated on the original sale and understated on the trade-in sale. This results from the granting