case study solution of joan holtz 5-4
These problems are intended to provide a basis for discussing questions aboutrevenue recognition that are not dealt with explicitly in the text and that are notsufficiently involved to warrant the construction of a regular case. Instructors can pick from among those listed. Some of them can be used as a take-off point for elaboration and extended discussion by adding “What if?” facts. Answers to Questions
1.If electricity usage tended to be fairly constant from month to month, onecould argue in this case for basing reported revenues solely on the actual meter readings: the unreported usage in December would be reported in January, andoverall revenues for this year would not be materially misstated. Stated another way, if revenues are based solely on meter readings, the December 2001 post-reading usage (which is recorded in January 2002) is, in effect, assumed to be the same 2002 post-reading usage. Prior to passage of the 1986 Tax ReformAct, this approach was permitted for income tax purposes. The 1986 actrequires the more acceptable (due to better matching) practice: estimating actualusage for the part of December after meters are read and reporting that usage as part of the revenues of that year. This is more sound accounting, in that withweather fluctuations and energy conservation efforts, it is questionable whether the post-reading usage in December 2001 would in fact not differ materiallyfrom the post-reading usage in December 2002. The same problem exists for operators of vending machines. The postal service has the opposite problem: itreceives cash from stamp sales before all of the stamps are used. It carries aliability (unearned revenues) for this effect. Both of these examples illustratethat even when cash is involved, the measurement of revenue is not necessarilystraightforward. 2.
This is one of the problems whose “true” resolution depends on events thatcannot be foreseen at the end of the accounting...
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