Question

What is the appropriate accounting treatment for recognizing revenue from the three-year maintenance contracts?

a) Recognize all revenue immediately on June 1, 2020.
b) Recognize revenue evenly over the three-year contract period.
c) Recognize revenue as the maintenance services are provided.
d) Defer revenue recognition until the end of the three-year contract period.

Answer 1

The revenue from the three-year maintenance contracts should be recognized evenly over the contract period, in accordance to the revenue recognition principle.

Step-by-step explanation:

The appropriate accounting treatment for recognizing revenue from the three-year maintenance contracts is b) Recognize revenue evenly over the three-year contract period. This is in accordance with the revenue recognition principle, which states that revenue should be recognized when it is earned and realizable, regardless of when cash is received. In the case of a maintenance contract, the company is earning the revenue over the course of the contract as it performs the maintenance services. Therefore, the revenue should be recognized proportionally over the period of the contract, which reflects the transfer of services.