Question

(Revenue Recognition Principle) After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the revenue is recognized with the publication of every issue of the company's magazine. She feels that the “crucial event” in the process of earning revenue in the magazine business is the cash sale of the subscription. She says that she does not understand why most of the revenue cannot be “recognized" in the period of the cash sale. Instructions

Discuss the propriety of timing the recognition of revenue in Piper Publishing Company's accounts with:

(a) The cash sale of the magazine subscription.

(b) The publication of the magazine every month.

(c) Over time, as the magazines are published and delivered to customers.

Short answer

Answer section:

1. Revenue recognises after the delivery of magazines.

2. Publication is not the sale of the magazine. So, revenue recognise after the subscription.

3. Revenue is recognised at the time of the delivery to the customers.

Step-by-step solution

Revenue Recognition Principle

Under the Revenue Recognition Principle, the revenue is recognized when the performance obligation is satisfied. The Performance Obligation is said to be met when the ownership in goods are transferred to the buyer at the time of delivery.

Revenue recognition in each case given

(a) In case of magazine subscription, the deposit method is used, thus the revenue is not recognized when cash is received it is recognized when the magazine is delivered as the ownership transfers on delivery. As the delivery of the magazine takes place the part of revenue is recognized.

(b) Publication of the magazine does not mean completion of performance obligation. The Published magazine can be said to be goods ready for sale but not yet sold. The revenue should be recognized only when the magazines are delivered to the customers. 80 only portion related to the delivery of the magazine should be recognized as revenue.

(c) Publication and delivery to the customers is the most appropriate way of recognizing the revenue. As the magazines are delivered so is the revenue recognized. Thus, the revenue is recognized as the performance obligation is met.