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.
According to historical data, the electricity usage usually tended to be fairly constant from month to month. The company can estimate the revenues for each month, by using historical data. Generally high fluctuation will not occur in electricity usage. We can easily estimate the monthly usage by the data of the same month last year. In this situation, if there is any inaccuracy we can adjust its estimation. Usually, the electricity usage is quite constant over time. Therefore, the company can estimate its revenues based on the data from the last year. If there is any inaccuracy, we can make adjustment in the following month.
Retainer fee. A law firm received a “retainer” of $10,000 on July 1, 2006, 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 2006? Why?
Only half of the “retainer” should be recognized. This is because, according to the Revenue Recognition Principle, we recognize the revenue when the service is rendered. At the end of the year, only six months of the services have been provided. Even when the client would request advice in a particular month, we still recognize the revenue because our service has always been ready due to our responsibility. In other words, we have been provided the service throughout the year constantly. Half of the “retainer” which is $5,000 should be counted as revenue in 2006, the rest $50,00 should be recorded as unearned revenue. We consider “retainer” as a 1 year service contract no matter when the customer will request advice. Actually, we are always stand by for any request from the customer, which mean we are providing service throughout the year constantly. Once you may argue that there may not be any service provided during the rest year. Like the unearned revenue of rent, once they paid an unearned revenue will be recorded, and during the rest period, revenue will be record according to time, no matter the customer “use” the room or not. For example, in the next month, there will be a decreasing of $1/12X10,000 in unearned revenue and the same amount of increasing in revenue. Contract based on period. Standing-by service: how to recognize?
Cruise. Raymond’s, a travel agency, chartered a cruise ship for two weeks beginning January 23, 2007, for $200,000. In return, the ship’s owner agreed to pay all costs of the cruise. In 2006, Raymond’s sold all available space on the ship for $260,000. It incurred $40,000 in selling and other costs in doing so. All the $260,000 was received in cash from passengers in 2006. Raymond’s paid $50,000 as an advance payment to the ship owner in 2006. How much, if any, of the $260,000 was revenue to Raymond’s in 2006? Why? Does the question of whether passengers were entitled to a refund in 2007 if they canceled their reservations make any difference in the answer? Why? According to the Revenue Recognition Principle, no revenue should be recognized in year 2006 because Raymond’s services started from January 23, 2007; revenue is recognized only when the company provides the service to its customers. The $260,000 is recognized as unearned revenue. If the customer cancel the reservations, both of the unearned revenue and the cash account of the company will be reduced. None of the revenue should be reported in 2006. Revenue should be recognized when the service is being...
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