Question

Identify the letter for the principle or assumption from A through F in the blank space next to each numbered situation that it best explains or justifies.

A. General accounting principle B. Measurement (cost) principle C. Business entity assumption D. Revenue recognition principle E. Expense recognition (matching) principle F. Going-concern assumption

1. In December of this year, Chavez Landscaping received a customer’s order and cash prepayment to install sod at a house that would not be ready for installation until March of next year. Chavez should record the revenue from the customer order in March of next year, not in December of this year.

2. If \(51,000 cash is paid to buy land, the land is reported on the buyer’s balance sheet at \)51,000.

3. Mike Derr owns both Sailing Passions and Dockside Digs. In preparing financial statements for Dockside Digs, Mike makes sure that the expense transactions of Sailing Passions are kept separate from Dockside Digs’s transactions and financial statements

Short answer

Revenue recognition states when the revenue should be recognized, and the situations are matched with the relevant principles or assumptions.

Step-by-step solution

Definition of revenue recognition

The revenue recognition principle states that any revenue should be recognized when goods or services are provided to the customer or the amount is expected to be receive from the customer.

Identification of principle or assumption

Situation	Principle or Assumption
1.	Revenue recognition
2.	Cost
3.	Business Entity