Question

If Janine uses the deferral method, then she would recognize the entire prepayment of $6,000 in year 2 when she delivers the goods. What method is Janine using to recognize the prepayment?

1) Accrual method
2) Cash method
3) Deferral method
4) None of the above

Answer 1

Janine is using the deferral method to recognize the prepayment in year 2 when she delivers the goods, rather than when she receives the cash, aligning with the accrual method of accounting.

Step-by-step explanation:

If Janine uses the deferral method to recognize the prepayment, she is practicing a revenue recognition principle where income is not recognized until the related goods or services are delivered. This is contrary to the cash method, where revenue is recognized at the time cash is received. The deferral method aligns with the accrual method of accounting, which dictates that revenue should be recognized when it is earned, regardless of when the payment is actually received. Therefore, the answer to the question, 'What method is Janine using to recognize the prepayment?' is option 3) Deferral method.