Concept explainers
Case 3-73 Recognition of Service Contract Revenue
Zac Murphy is president of Blooming Colors Inc. which provides landscaping services in Tallahassee, Florida. On November 20, 2019, Mr. Murphy signed a service contract with Eastern State University. Under the contract, Blooming Colors will provide landscaping services for all Of Eastern’s buildings for a period of 2 years beginning on January l, 2020, and Eastern will pay Blooming Colors on a monthly basis beginning on January 31, 2020. Although the same amount of landscaping services will be rendered in every month, the contract provides for higher monthly payments in the first year.
Initially, Mr. Murphy proposed that the revenue from the contract should be recognized when the contract is signed in 2019; however, his accountant, Sue Storm, convinced him that this would be inappropriate. Then Mr. Murphy proposed that the revenue should be recognized in an amount equal to the cash collected under the contract. Again, Ms. Storm argued against his proposal, indicating that generally accepted accounting principles (GAAP) required recognition of an equal amount of contract revenue each month.
Required:
Put yourself in the position of Sue Storm. How would you convince Mr. Murphy that his two proposals are unacceptable and that an equal amount of revenue should be recognized every month?
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Cornerstones of Financial Accounting
- Case 3-73 Recognition of Service Contract Revenue Zac Murphy is president of Blooming Colors Inc. which provides landscaping services in Tallahassee, Florida. On November 20, 2019, Mr. Murphy signed a service contract with Eastern State University. Under the contract, Blooming Colors will provide landscaping services for all Of Easterns buildings for a period of 2 years beginning on January l, 2020, and Eastern will pay Blooming Colors on a monthly basis beginning on January 31, 2020. Although the same amount of landscaping services will be rendered in every month, the contract provides for higher monthly payments in the first year. Initially, Mr. Murphy proposed that the revenue from the contract should be recognized when the contract is signed in 2019; however, his accountant, Sue Storm, convinced him that this would be inappropriate. Then Mr. Murphy proposed that the revenue should be recognized in an amount equal to the cash collected under the contract. Again, Ms. Storm argued against his proposal, indicating that generally accepted accounting principles (GAAP) required recognition of an equal amount of contract revenue each month. Required: 3. If Ms. Storms proposal is adopted. how would the contract be reflected in the balancesheets at the end of 2019 and at the end of 2020?arrow_forwardCase 3-73 Recognition of Service Contract Revenue Zac Murphy is president of Blooming Colors Inc. which provides landscaping services in Tallahassee, Florida. On November 20, 2019, Mr. Murphy signed a service contract with Eastern State University. Under the contract, Blooming Colors will provide landscaping services for all Of Easterns buildings for a period of 2 years beginning on January l, 2020, and Eastern will pay Blooming Colors on a monthly basis beginning on January 31, 2020. Although the same amount of landscaping services will be rendered in every month, the contract provides for higher monthly payments in the first year. Initially, Mr. Murphy proposed that the revenue from the contract should be recognized when the contract is signed in 2019; however, his accountant, Sue Storm, convinced him that this would be inappropriate. Then Mr. Murphy proposed that the revenue should be recognized in an amount equal to the cash collected under the contract. Again, Ms. Storm argued against his proposal, indicating that generally accepted accounting principles (GAAP) required recognition of an equal amount of contract revenue each month. Required: 1. Give a reason that might explain Mr. Murphys desire to recognize contract revenue earlier rather than later.arrow_forwardExercise 3-40 Revenue and Expense Recognition Electronic Repair Company repaired a high-definition television for Sarah Merrifield in December 2019. Sarah paid $80 at the time of the repair and agreed to pay Electronic Repair $80 each month for 5 months beginning on January 15, 2020. Electronic Repair used $120 of supplies, which were purchased in November 2020, to repair the television. Assume that Electronic Repair uses accrual-basis accounting. Required: In what month or months should revenue from this service be recorded by Electronic Repaid? In what month or months should the expense related to the repair of the television be recorded by Electronic Repair? CONCEPTUAL CONNECTION Describe the accounting principles used to answer the above questions.arrow_forward
- Problem 3-62A Cash-Basis and Accrual-Basis Income George Hathaway, an electrician, entered into an agreement with a real estate management company to perform all maintenance of basic electrical systems and air-conditioning equipment in the apartment buildings under the companys management. The agreement, which is subject to annual renewal, provides for the payment of a fixed fee of S6,600 on January 1 of each year plus amounts for parts and materials billed separately at the end of each month. Amounts billed at the end of I month are collected in the next month. During the first 3 months of 2019, George makes the following additional billings and cash collections: Required: 1. Calculate the amount of cash-basis income reported for each of the first 3 months. 2. Calculate the amount of accrual-basis income reported for each of the first 3 months. 3. CONCEPTUAL CONNECTION Why do decision-makers prefer accrual-basis accounting?arrow_forwardExercise 3-47 Revenue Adjustments Sentry Transport Inc. of Atlanta provides in-town parcel delivery services in addition to a full range of passenger services. Sentry engaged in the following activities during the current year: Sentry received $5,000 cash in advance from Richs Department Store for an estimated 250 deliveries during December 2019 and January and February of 2020. The entire amount was recorded as unearned revenue when received. During December 2019, 110 deliveries were made for Richs. Sentry operates several small buses that take commuters from suburban communities to the central downtown area of Atlanta. The commuters purchase, in advance, tickets for 50 one-way rides. Each So-ride ticket costs S500. At the time of purchase, Sentry credits the cash received to unearned revenue. At year end, Sentry determines that 10,160 one-way rides have been taken. Sentry operates buses that provide transportation for the clients of a social agency in Atlanta. Sentry bills the agency quarterly at the end of January, April, July, and October for the that quarter. The contract price is S7,500 per quarter. Sentry follows the practice of recognizing revenue from this contract in the in which the service is On December 23, Delta Airlines chartered a bus to transport its marketing group to a meeting at a resort in southern Georgia. The meeting will be held during the last week in January 2020, and Delta agrees to pay for the entire trip on the day the bus departs. At year end, none Of these arrangements have been recorded by Sentry. Required: Prepare adjusting entries at December 31 for these four activities. CONCEPTUAL CONNECTION What would be the effect on revenue if the adjusting entries were not made?arrow_forwardCase 2-68 Accounting for Partially Completed Events: 3 Prelude to Chapter 3 Ehrlich Smith. the owner of The Shoe Bone has asked you to help him understand the proper way to account for certain accounting items as he prepares his 2019 financial statements. Smith has provided the following information and observations: (Continued) a. A 3-year fire insurance policy was purchased on 2019, for $2,400. Smith believes that a part of the cost of the insurance policy should be allocated to each period that benefits from its coverage. b. The store building was purchased for 580,000 in January 2011. Smith expected then (as he does now) that the building will be serviceable as a shoe store for 20 years from the date of purchase. In 2011, Smith estimated that he could sell the property for $6,000 at the end of its serviceable life. He feels that each period should bear some portion of the cost of this long-lived asset that is slowly being consumed. c. The Shoe Box borrowed 520300 on a 1-year, 8% note that is due on September 1 next year) Smith notes that $21,600 cash will be required to repay the note at maturity. The $1,600 difference is, he feels, a cost of using the loaned funds and should be spread over the periods that benefit from the use of' the loan funds; Required: Explain what Smith is trying to accomplish with the three items. Are his objectives supported by the concepts that underlie accounting?arrow_forward
- Exercise 3-44 Revenue Expense and Recognition Carrico Advertising Inc. performs advertising services for several Fortune 500 companies. The following information describes Carricos activities during 2019. At the beginning of 2019, customers owed Carrico $45,800 for advertising services formed during 2018. During 2019, Carrico performed an additional $695,100 of advertising services on account. Carrico collected $708,700 cash from customers during 2019. At the beginning of 2019, Carrico had $13,350 of supplies on hand for which it owed suppliers SS, 150. During 2019, Carrico purchased an additional $14,600 of supplies on account. Carrico also paid $19,300 cash owed to suppliers for goods previously purchased on credit. Carrico had of supplies on hand at the end of 2019. Carricos 2019 operating and interest were $437 and $133,400, respectively. Required: Calculate Carricos 2019 income before taxes. Calculate the ending balance of receivable, the supplies used, and the ending balance of accounts payable. CONCEPTUAL CONNECTION Explain the underlying principles behind why the three accounts computed in Requirement 2 exist.arrow_forwardExpense Adjustments Faraday Electronic Service repairs stereos and DVD players. During 2019, Faraday engaged in the following activities: On September 1, Faraday paid Wausau Insurance $4,860 for its liability insurance for the next 12 months. The full amount of the prepayment was debited to prepaid insurance. At December 31, Faraday estimates that $1,520 of utility costs are unrecorded and unpaid. Faraday rents its testing equipment from JVC. Equipment rent in the amount of $1,440 is unpaid and unrecorded at December 31. In late October, Faraday agreed to become the sponsor for the sports segment of the evening news program on a local television station. The station billed Faraday $4,350 for 3 months' sponsorship-November 2019, December 2019, and January 2020-in advance. When these payments were made, Faraday debited prepaid advertising. At December 31, 2 months' advertising has been and I month remains unused. Required: Prepare adjusting entries at December 31 for these four activities. CONCEPTUAL CONNECTION What would be the effect on expenses if the adjusting entries were not made?arrow_forwardProblem 3-64B Identification and Preparation of Entries Morgan Dance Inc. provides ballet, tap, and jazz dancing instruction to promising young dancers. Morgan began operations in January 2020 and is preparing its monthly financial statements. The following items describe Morgans transactions in January 2020: Morgan requires that dance instruction be paid in advance-either monthly or quarterly. On January 1, Morgan received $4,125 for dance instruction to be provided during 2020. On January 31, Morgan noted that $825 of dance instruction revenue is still unearned. On January 20, Morgans hourly employees were paid $1,415 for work performed in January. Morgans insurance policy requires semiannual premium payments. Morgan paid the $3,000 insurance policy which covered the first half of 2020 in December 2019. When there are no scheduled dance classes, Morgan rents its dance studio for birthday parties for $100 per two-hour party. Four birthday parties were held during January. Morgan will not bill the parents until February. Morgan purchased $350 of office supplies on January 10. On January 31, Morgan determined that Office supplies of $770 were unused. Morgan received a January utility bill for S770. The bill will not be paid until it is due in February. Required: Identify whether each transaction is an adjusting entry or a regular journal entry. If the entry is an adjusting entry, identify it as an accrued revenue, accrued expense, deferred revenue, or deferred expense. Prepare the entries necessary to record the transactions above and on the previous page.arrow_forward
- Problem 3-71 A Preparing a Worksheet (Appendix 3A) Marsteller Properties Inc. owns apartments that it rents to university students. At December 31, 2019, the following unadjusted account balances were available: The following information is available for adjusting entries: An analysis of apartment rental contracts indicates that S3,800 of apartment rent is unbilled and unrecorded at year end. A physical count Of supplies reveals that $1,400 of supplies are on hand at December 31 , 2019. Annual depreciation on the buildings is $204,250. An examination of insurance policies indicates that $12,000 Of the prepaid insurance applies to coverage for 2019. Six months' interest at 9% is unrecorded and unpaid on the notes payable.arrow_forwardUnearned Revenue Jennifers Landscaping Services signed a $400-per-month contract on November 1, 2019, to provide plant watering services for Lola Inc.s office buildings. Jennifers received 4 months' service fees in advance on signing the contract. Required: 1. Prepare Jennifers journal entry to record the cash receipt for the first 4 months. 2. Prepare Jennifers adjusting entry at December 31, 2019. 3. CONCEPTUAL CONNECTION How would the advance payment (account(s) and amounts(s)] be reported in Jennifers December 31, 2019, balance sheet? How would the advance payment [account(s) and amount(s)] be reported in Lolas December 31, 2019, balance sheet?arrow_forwardCase 3-72 Cash- or Accrual-Basis Accounting Karen Ragsdale owns a business that rents parking spots to students at the local university. Karens typical rental contract requires the student to pay the years rent of $450 ($50 per month) on September 1. When Karen prepares financial statements at the end of December, her accountant requires that Karen spread the $450 over the 9 months that each parking Spot is rented. Therefore, Karen can recognize only $200 of revenue (4 months) from each parking spot rental contract in the year the cash is collected and must defer (delay) recognition of the remaining $250 (5 months) to the next year. Karen argues that getting students to agree to rent the parking Spot is the most difficult part of the activity so she Ought to be able to recognize all $450 as revenue when the cash is received from a student. Required: Why do generally accepted accounting principles require the use of accrual accounting rather than cash-basis accounting for transactions like the one described here?arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning