"Your course unfortunately doesn't give me the answer to a great many real-life problems," said Marsh Grube to an accounting professor. "I've read the text and listened to you attentively, but every once in a while I run across something that doesn't seem to fit the rules."
"Not all of life's complications can be covered in a first course," the professor replied. "As is the case with law, medicine, or indeed any of the professions, many matters are dealt with in advanced courses, and others are not settled in any classroom. Nevertheless, some problems that are not specifically discussed can be solved satisfactorily by relating them to principles that you already have learned. Let's take revenue recognition as a particularly difficult case in point. If you will write down some of the matters about which you are now uncomfortable, I'd be glad to discuss them with you-that is, after you have given some thought as to the most reasonable solution."
A week later, Grube returned with the list given below:
Electric utility bills. When an electric utility customer uses electricity, the electric company has earned revenues. It is obviously impossible, however, for the company to read all of its customers' meters on the evening of December 31. How does the electric company know its revenue for a given year? Explain.
Retainer fee. A law firm received a "retainer" of $10,000 on July 1, 2010, from a client. In return, it agreed to furnish general legal advice upon request for one year. In addition, the client would be billed for regular legal services such as representation in litigation. There was no way of knowing how often, or when, the client would request advice, and it was quite possible that no such advice would be requested. How much of the $10,000 should be counted as revenue in 2010? Why?
3. Cruise. Raymond's, a travel agency, chartered a cruise ship for two weeks beginning January 23, 2011, for $200,000. In...
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