E318 Comparing cash and accrual basis accounting and applyin

E3-18 Comparing cash and accrual basis accounting and applying the revenue recognition principle Momentous Occasions is a photography business that shoots videos at college parties. The freshman class pays $1,000 in advance on March 3 to guarantee services for its party to be held on April 2. The sophomore class promises a minimum of $2,800 for filming its formal dance and actually pays cash of $4,100 on February 28 at the dance. Answer the following questions about the correct way to account for revenue under the accrual basis: a. Considering the $1,000 paid by the freshman class, on what date was revenue recognized? Diod the recognition occur on the same date cash was received? b. Considering the $4,100 paid by the sophomore class, on what date was revenue recognized\'? Did the recognition occur on the same date cash was received?

Solution

Answer a:

As per revenue recognition principle, revenue has to be recognized when it is earned and realizable.

In case of the freshman class, the revenue was earned when services were performed on April 2 and hence revenue was recognized on April 2. As such the recognition did not occur on same date (March 3) when cash was received. On March 3, it remained unearned revenue.

Answer b:

Considering the $4,100 paid by the Sophomore class, the revenue was recognized when the same was earned ( services were performed) on February 28.

The recognition occurred on the same date (February 28) cash was received.