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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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After the presentation of your report on the examination of the financial statements to the board of directors of Savage Publishing Company, one of the new directors says he is surprised the income statement assumes that revenue is recognized over the period consistent with the publication of every issue of the company’s magazine, He feels that the “crucial event” in the process of recognizing revenue in the magazine business is the cash sale of the subscription. He does not understand why—other than for the smoothing of income—most of the revenue cannot be “recognized” in the period of the sale.

Required:

Explain the propriety of timing the recognition of revenue in Savage Publishing’s accounts with:

  1. 1. the cash sale of the magazine subscription
  2. 2. the publication of the magazine every month

1.

To determine

Enumerate the propriety of timing the recognition of revenue in Company S’s accounts with the cash sale of the magazine subscription.

Explanation
  • Revenue recognition must match with the service provided to the subscriber, which satisfies the “performance obligation” of magazine to its customer. The new director suggests that revenue earned from “subscription sales and advertising must be identified in the accounts when the complex task of selling is attained and not when the magazines are available to fill-in the subscriptions or to carry the advertising.
  • The view of director that there is a single “crucial event” in the process of revenue recognition in the business of magazine is doubtful, although the sum of revenue is ascertainable when the subscriptions are sold. Even though the company cannot flourish without good advertising contracts, and whereas rates of advertising depend considerably on sale of magazines, it is true that a reader will not renew the subscription until the substance of the magazine is satisfying...

2.

To determine

Enumerate the propriety of timing the recognition of revenue in Company S’s accounts with the publication of the magazine every month.

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