Textbook Problem

Recognition of Service Contract Revenues

Jackson Dunlap is president of New Miami Maintenance Inc. which provides building maintenance services. On October 15, 2019, Jackson signed a service contract with Western College, and, Western made a down payment of $12,000. Under the contract, New Miami will provide maintenance services for all Western’s buildings for a period of 2 years, beginning on January 1, 2020, and Western will pay New Miami $1,000 per month, beginning on January 31, 2020.

Initially, Jackson proposed that some portion of the revenue from the contract should be recognized in 2019; however, his accountant, Rita McGonigle, convinced him that this would be inappropriate. Then Jackson proposed that the revenue should be recognized in an amount equal to the cash collected under the contract in 2019. Again, Rita argued against his proposal, saying that generally accepted accounting principles required recognition of an equal amount of contract revenue each month.

Required:

Give a reason that might explain Jackson’s desire to recognize contract revenue earlier rather than later.