Question

The City of Deauville entered into a service concession arrangement (SCA) with Water Wonders, Inc., to operate the city pool for the next 20 years. Water Wonders has agreed to pay the city $3,000,000 up front as a part of this agreement. According to the agreement, Water Wonders will be responsible for operating the pool, and the city will continue to be responsible for costs related to maintaining it. In addition, Water Wonders has the right to collect fees from the public for their use of the pool, although the rates are subject to approval by the city. The city should:

Option 1: Record the $3,000,000 as revenue immediately.
Option 2: Recognize revenue over the 20-year period.
Option 3: Only record expenses related to maintaining the pool.
Option 4: Allow Water Wonders to set the fee rates without approval.

Answer 1

The City of Deauville should record the $3,000,000 upfront payment as revenue immediately and continue to record expenses related to maintaining the pool.

Step-by-step explanation:

The City of Deauville should record the $3,000,000 as revenue immediately when entering into a service concession arrangement (SCA) with Water Wonders, Inc.

This is because the $3,000,000 payment is considered an upfront payment from Water Wonders for the right to operate the city pool.

Revenue recognition generally follows the revenue recognition principle, which requires revenue to be recognized when it is earned and realized or realizable.

Since the payment is received upfront, it is considered earned and realized at the time of entering into the agreement.

Option 1 is the correct choice since it aligns with the revenue recognition principle and records the revenue when it is earned and realized by the city.

The city should also record expenses related to maintaining the pool as they continue to be responsible for these costs. This will ensure accurate and complete financial reporting of the arrangement.