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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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On August 31, 2019, Montana Corporation signed a 4-year contract to provide services for Minefield Company at $30,000 per year. Minefield will pay for each year of services on the first day of each service year, starting with September 1, 2019. Using the accrual basis of accounting, when should Montana recognize revenue?

a. On the first day of each year when the cash is received

b. Equally throughout the year as services are provided

c. On the last day of each year after the services have been provided

d. Only at the end of the entire contract

To determine

Revenue recognition:

Revenue recognition on the accrual accounting basis is done when the amount is received or receivable and the services are performed i.e. the income is earned and realised or realisable.

To select:

The best time for recognizing the revenue for Montana.

Explanation

The revenue recognition on the accrual basis is made when the price for the services is received pr receivable and such income has been earned. Income has been earned means the services are provided or performed and the amount is certain to be realised or realisable.

The revenue cannot be recognised on the first day i.e. at the date of receiving the cash as the second obligation of performance is not satisfied on that date. Hence, option (a) is not correct.

The revenue can be recognised equally throughout the year as the income is received on the first date which fulfils first rule and on satisfaction of performance obligation i...

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