Question

In 20X1, Ginzel Corporation agreed to provide a client with 20 detailed marketing analyses of its client's key products for a total fee of $110,000. The fee was computed as $5,000 per report × 20 reports = $100,000, plus $10,000 to extract the necessary data from the client's system and convert it into the format Ginzel needs to do the analysis. It cost Ginzel $4,000 to complete the data extraction and conversion. As of December 31, 20X1, Ginzel has completed the conversion of the data and has completed and delivered 7 of the 20 marketing reports to the client. 1. How much revenue should Ginzel recognize in 20X1? 2. How should Ginzel account for the $4,000 in costs it incurred to extract and convert the client's data?

Answer 1

1. $38,500
2. $1,400

Explanation:

1. According to the Accrual Principle of Accounting, revenue should only recognized when the goods or services for which it was paid for have been delivered. In other words, revenue should only be recognized when earned.

As of December 1, 20X1, Ginzel had only completed 7 of the 20 reports so the revenue recognized should be for the completed reports alone.

Total revenue for 20 reports = $110,000

Revenue for 7 reports = 7/ 20 * 110,000

= $38,500

2. The Accrual principle also applies to expenses and states that expenses should only be accounted for when incurred. As the $4,000 relates to all the reports, it should be apportioned evenly.

The costs of extraction and conversion of data for the year should therefore be;

= 7/20 * 4,000

= $1,400