It is generally agreed that sales revenue should only be ‘realized’ and so ‘recognized’ in the trading, profit and loss account when: The sale transaction is for a specific quantity of goods at a known price, so that the sales value of the transaction is known for certain. The sale transaction has been completed, or else it is certain that it will be completed (e.g. in the case of long-term contract work, when the job is well under way but not yet completed by the end of an accounting period). The critical event in the sale transaction has occurred. The critical event is the event after which: i) It becomes virtually certain that cash will eventually be received from the customer. ii) Cash is actually received. Usually, revenue is ‘recognized’ When a cash sale is made. The customer promises to pay on or before a specified future date, and the debt is legally enforceable. The prudence concept is applied here in the sense that revenue should not be anticipated, and included in the trading, profit and loss account, before it is reasonably certain to ‘happen’. Required Given that prudence is the main consideration, discuss under what circumstances, if any, revenue might be recognized at the following stages of a sale. (a) Goods have been acquired by the business, which it confidently expects to resell very quickly.(b) A customer places a firm order for goods.(c) Goods are delivered to the customer.(d) The customer is invoiced for goods.(e) The customer pays for the goods. (f) The customer’s cheque in payment for the goods has been cleared by the bank.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter17: Advanced Issues In Revenue Recognition

Section: Chapter Questions

Problem 2C: The first step in the revenue recognition process is determining if a contract is in place between...

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It is generally agreed that sales revenue should only be ‘realized’ and so ‘recognized’ in the trading, profit and loss account when:

The sale transaction is for a specific quantity of goods at a known price, so that the sales value of the transaction is known for certain.
The sale transaction has been completed, or else it is certain that it will be completed (e.g. in the case of long-term contract work, when the job is well under way but not yet completed by the end of an accounting period).
The critical event in the sale transaction has occurred. The critical event is the event after which:

i) It becomes virtually certain that cash will eventually be received from the customer.
ii) Cash is actually received.

Usually, revenue is ‘recognized’

When a cash sale is made.
The customer promises to pay on or before a specified future date, and the debt is legally enforceable.

The prudence concept is applied here in the sense that revenue should not be anticipated, and included in the trading, profit and loss account, before it is reasonably certain to ‘happen’.

Required

Given that prudence is the main consideration, discuss under what circumstances, if any, revenue might be recognized at the following stages of a sale.

(a) Goods have been acquired by the business, which it confidently expects to resell very quickly.
(b) A customer places a firm order for goods.
(c) Goods are delivered to the customer.
(d) The customer is invoiced for goods.
(e) The customer pays for the goods.

(f) The customer’s cheque in payment for the goods has been cleared by the bank.

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