Both criteria of basis revenue recognition are confirmed: Entity has substantially performed what is required in order to earn income and the amount of income can be reliably measured. Because of the problem which occurs by reading out the customers meters the company should estimate the revenues for the month December. It has many historical data about the electricity usage of its customers. For example it could relay on the experiences of the last December. Normally there are no high fluctuations in electricity usage. If there are any changes of the circumstances the company could adjust its estimations.
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?
None of the $10,000 should be counted as revenue in 2006:
If we treat this arrangement as “services” to be provided, in accordance with the SEC issued Staff Accounting Bulletin No. 101 (SAB 101), providing the service is the act of performance. In general, SAB 101 requires substantial performance of the sales arrangement by the seller-- A seller should substantially complete or fulfill the terms specified in the sales arrangement. This is the most conservative approach; however, one might argue that the same principle that applies to franchises may be applicable. If so, one could potentially seek to count the retainer as revenue at which time the first general legal advice request is made.
3. 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...
Please join StudyMode to read the full document