Question

The Grass is Greener corporation provides $6,000 worth of lawn care on account during the month. Experience suggests that about 2% of net credit sales will not be collected. According to the revenue recognition principle and the matching principle, the company should:

1) Recognize the revenue when the lawn care is provided
2) Recognize the revenue when the payment is received
3) Recognize the revenue when the lawn care is provided and the payment is received
4) Recognize the revenue when the payment is received and the lawn care is provided

Answer 1

According to the revenue recognition principle and the matching principle, the Grass is Greener corporation should recognize the revenue when the lawn care is provided.

Step-by-step explanation:

According to the revenue recognition principle and the matching principle, the Grass is Greener corporation should recognize the revenue when the lawn care is provided. The revenue recognition principle states that revenue should be recognized when it is earned, regardless of when payment is received, while the matching principle dictates that expenses should be matched with the revenues they generate. In this case, when the lawn care is provided, the corporation earns the revenue, and therefore, it should recognize it at that point.

Recognizing the revenue when the payment is received would not align with the revenue recognition principle, and recognizing the revenue when both the lawn care is provided and the payment is received would be double-counting the revenue. Furthermore, the fact that about 2% of net credit sales will not be collected should not impact the recognition of revenue, as it is a separate issue related to collections.