CA25 Revenue Recognition Principle After the presentation of

CA2-5 (Revenue Recognition Principle) After the presentation of your report on the examination of the financial st ments to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the inoo statement assumes that an equal proportion of the revenue is recognized with the publication of every issue of the c pany\'s magazine. She feels that the \"crucial event\" in the process of earning revenue in the magazine business is thec sale of the subscription. She says that she does not understand why most of the revenue cannot be \"recognized\" in period of the cash sale. Instructions Discuss the propriety of timing the recognition of revenue in Piper Publishing Company\'s accounts with: (a) The cash sale of the magazine subscription. (b) The publication of the magazine every month. (c) Over time, as the magazines are published and delivered to customers.

Solution

One of the major issue in determining when revenue should be recognised is \"Time of sale\" that is when revenue should be recognised .It can be at various points:

a)When cash is received

b)When magzine is published

c)Over the period as and when magzine is delieverd to customers.

So as per revenue recognition principle ,revenue should recognised at the time of sale .The definition of sale is

Transfer of ownership to buyer for a value and that value is determinable and reasonably certain to be receivable..

A)So even if cash is received revenue is not recognised as ownership of magazine will be transfered when it is delievered to customer ,so no revenue will be recognised in that case.

B)Even if magazine is published till it is not delievered to customer ,revenue should not be recognised as it doesnot meet sale recognition criteria.

c)Over the time as and when magazine is published and delievered ,revenue should be recognised .

The part \"C\" amounts to sale as ownership is transfered to customer ,revenue should be recognised that is every time as and when magazine is published and delievered ,revenue should be recognised provided it is reasonably certain amount is realizable.