Question

Revenue Recognition

The highway department contracted with a private company to collect tolls and maintain facilities on a turnpike. Users of the turnpike can pay cash as they approach the toll booth, or they can purchase a pass. The pass is equipped with an electronic sensor that subtracts the toll fee from the pass balance as the motorist slowly approaches a special toll booth. The passes are issued in $10 increments. Refunds are available to motorists who do not use the pass balance, but they are issued very infrequently. Last year, $4,710,000 was collected at the traditional toll booths, $3,160,000 of passes were issued, and $2,690,000 of passes were used at the special toll booth.

Which of the following statements shows the correct amount of revenue the company should recognize and reason why this is correct?

a.Total revenue recognized would be $7,400,000 based on the total amount earned during the year for cars that used the tolls.

b.Total revenue recognized would be $4,710,000 based on the cash that was collected at the toll booths.

c.Total revenue recognized would be $3,160,000 based on the passes issued during the year.

d.Total revenue recognized would be $7,870,000 based on the cash collected at the toll booths in addition to the passes issued.

Answer 1

Answer ) option a Total revenue recognized would be $7,400,000 based on the total amount earned during the year for cars that used the tolls. Revenue is recognised when earned that is when the services are delivered. In case of $4,710,000 services are renderd but in case of passes issued income will be recognised only when services are delivered thus out of the 3,160,000 passes issued only $2,690,000 passes actually used will be said to be delivered and hence the revenue recognized will be $4,710,000+2,690,000 = 7,400,000.