Question

For each of the following independent situations, answer the specific revenue concerns (provide authoritative support where appropriate).

1) Company A enters into a contract on February 1, 2018 to manage rental property for Company B for the next 5 years. Company A will provide all services related to the management of the property and will receive a monthly payment equal to 2% of the gross rentals from the property. Historically, property of this type in this area has averaged an 85% occupancy rate. How should Company A determine the amount and timing of revenue recognition under this contract?

2) Company A is constructing a high-rise luxury apartment building. The building will contain 80 apartments of similar size and layout. During 2018, Company A receives a deposit of $100,000 from a customer for one of the apartments. The deposit is only refundable if Company A fails to complete the building. Company A expects completion early in 2019. The remainder of the apartment’s sale price ($900,000) is due from the customer at the completion of the building when the customer can take possession. Can Company A recognize revenue in 2018 related to the contract with the customer paying the deposit?

3) Bakery A has an incentive plan that gives its customers one point for each doughnut purchased. A customer that has accumulated 15 points can receive a free doughnut. During the current year, Bakery A sold 201,600 doughnuts at $1.20 each. Bakery A expects 90% of the points to be redeemed and 10,500 were redeemed in the current year. How much revenue should Bakery A recognize in the current year related to the sale of the doughnuts and the incentive plan?

Answer 1

1). Since the company A provides all services to the management of the property, for which it wiill receive a monthly rental of 2% of the gross rentals. The company should recognise the full rental received from the property on accrual basis.

2). Since the company A has not completed and handed over the project, based on the anticipation, he cannot record and recognise a revenue anticipated one year in advance by 2019. Since the project is expected to be completed by 2019, only then the revenue be recognised, it cannot be recognised in 2018. Only the progress can be recognised.

3). The Full revenue from sale of doughnut is recognised as 201,600 * $1.20 = $241,920, in the current year.

Incentive plan = 201600/15 = 13440 units

13440 units * Cost of Doughnut.

The cost of the doughnut will be recognised in the current year.