Question

On January 1, 2016, Elite Advertising was contracted to run a marketing campaign for Pharm King's new dieting pills. In addition to getting a base fee of $150,000 for the 3-year campaign, Elite also may get an additional 5% of the base fee as a bonus if a targeted sales level is reached at the end of three years. Elite currently lacks sufficient information to make an estimate of the likelihood of the expected bonus, with the marketing director indicating that "If you forced me to make an estimate, I'd say we have a 50/50 chance. But don't quote me on that - it's really too early to tell." Elite concludes this contract qualifies for revenue recognition over time, and estimates variable consideration using the most likely amount. How much revenue should Elite recognize as of December 31, 2016? A. $50,000B. $51,250C. $52,500D. $57,500

Answer 1

A. $50,000

Step-by-step explanation:

150,000 for a 3 year compaing = 50,000 per year

The contract has just started and the information available doesn't meet the criteria.

We must remember that accounting has a principle of conservatism regarding revenues. Accrue revenue without proper grounds is not correct. We should recognize the 1/3 of the base fee which is earned and matched the accounting cycle.