Question

Required: For each situation, determine the date for which the company recognizes the revenue under accrual-basis accounting.

1. American Airlines collects cash on June 12 from the sale of a ticket to a customer. The flight occurs on August 16. August 16. June 12.
2. A customer purchases sunglasses from Eddie Bauer on January 27 on account. Eddie Bauer receives payment from the customer on February 2. January 27. February 2.
3. On March 30, a customer preorders 10 supreme pizzas (without onions) from Pizza Hut for a birthday party. The pizzas are prepared and delivered on April 2. The company receives cash at the time of delivery. March 30. April 2.
4. A customer pays in advance for a three-month subscription to Sports Illustrated on July 1. Issues are scheduled for delivery each week from July 1 through September 30. September 30. Revenue would be recognized as each magazine is delivered.

Answer 1

1. August 16

2. January 27

3. April 2

4. Revenue should be recognized as each magazine is delivered

Step-by-step explanation:

Under the accrual basis of accounting, revenue is recognized when a product is delivered or when a service is rendered. Under this basis of accounting, it is not important when payment for the good or service is received.

1. The service (flight) was rendered on August 16. Therefore, revenue will be recognized on August 16.

2. The product (sunglasses) were received by the customer on January 27. Therefore, revenue will be recognized on January 27.

3. The product (pizzas) were delivered to the customer on April 2. Therefore, revenue will be recognized on April 2.

4. The advance payment received from the customer will be spread out over of the three-months subscription payment. The apportioned revenue will be recognized as a magazine is delivered.