Both conditions for recognizing revenue are satisfied, as the entity has fulfilled its obligations to earn income and can ascertain the precise amount of income earned. Nevertheless, due to challenges in meter reading, the company needs to estimate revenues for December. To accomplish this, it may utilize historical data, specifically electricity usage from the previous December, since there are usually no notable fluctuations in usage.
If there are any changes in the circumstances, the company has the ability to adjust its estimations.
Retainer Fee: On July 1, 2006, a law firm received a $10,000 retainer fee from a client. The firm agreed to provide general legal advice upon request for one year. The client would also be billed for regular legal services, including representation in litigation. The frequency and timing of advice requests were uncertain, and
...there was a possibility of no requests being made.
None of the $10,000 should be recognized as revenue in 2006. According to the SEC issued Staff Accounting Bulletin No. 101 (SAB 101), treating this arrangement as "services" requires the act of performance, which means the seller should substantially complete or fulfill the terms specified in the sales arrangement. This is a conservative approach. However, some argue that the principle applied to franchises might be applicable. In that case, one could consider counting the retainer as revenue when the first general legal advice request is made.
Cruise: Raymond's, a travel agency, rented a cruise ship for two weeks starting on January 23, 2007. The total cost of the charter was $200,000 and the owner of the ship was responsible for covering all expenses during the cruise. In the year prior to the cruise, Raymond's
managed to sell all available space on the ship for $260,000 in cash from passengers during 2006. However, additional costs amounting to $40,000 were incurred by the agency in order to make these sales.
Raymond’s made an advance payment of $50,000 to the ship owner in 2006. The question is how much of the $260,000 revenue should be attributed to Raymond’s in 2006 and whether the potential refund for canceled reservations in 2007 affects the answer. It's important to note that none of the revenue should be reported in 2006.
Delivery Qualifier:
The recognition of revenue should only occur after the seller has substantially fulfilled the terms stated in the purchase order or sales agreement.
Performance Qualifier:
Revenue should only be recognized once the seller has fulfilled the terms outlined in the sales agreement (e.g., completed trip, sailed ship). The involvement of a consignee (travel agent as a mediator) does not apply here, as the assignee has taken on the risks and rewards of ownership. If passengers were entitled to a refund, it would further support deferring revenue recognition until after the trip has taken place.
Accretion:
On November 1, 2006, a nursery owner had a plot of land with Christmas trees that were four years old.
The owner had spent $3 per tree until now. A wholesaler proposed buying the trees for $4 each and covering all expenses for cutting, bundling, and transporting them to the market. However, the nursery owner rejected this offer and determined that it would be more advantageous to allow the trees to grow for another year, as the additional cost would be
insignificant. The price of Christmas trees fluctuates based on their height.
The nursery owner is unable to generate any revenue from these trees in 2006 for various reasons. Initially, no sales order exists for them, indicating that no transaction has occurred. Additionally, the goods have not been delivered, resulting in the buyer not yet taking ownership. Moreover, there is no commitment or agreement to buy the trees at a later date. Lastly, there is no assurance of generating future sales revenue from these trees. Furthermore, since the trees are still growing and have not reached full maturity, the production method does not apply in this case.
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