Question

(Recognition of Revenue—Bonus Points) Griseta&Dubel Inc. was formed early this year to sell merchandise credits to merchants, who distribute the credits free to their customers. For example, customers can earn additional credits based on the dollars they spend with a merchant (e.g., airlines and hotels). Accounts for accumulating the credits and catalogs illustrating the merchandise for which the credits may be exchanged are maintained online. Centers with inventories of merchandise premiums have been established for redemption of the credits. Merchants may not return unused credits to Griseta&Dubel.

The following schedule expresses Griseta&Dubel’s expectations as to the percentages of a normal month’s activity that will be attained. For this purpose, a “normal month’s activity” is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. The company expects that this level will be attained in the third year and that sales of credits will average $6,000,000 per month throughout the third year.

Month	Actual credit sale Percent	Merchandise premium purchased percent	Credit Redemption percent
6th	30%	40%	10
12th	60	60	45
18th	80	80	70
24th	90	90	80
30th	100	100	95

Griseta&Dubel plans to adopt an annual closing date at the end of each 12 months of operation.

Instructions

Discuss the factors to be considered in determining when revenue should be recognized.

Short answer

Performance obligation and control over assetsare the determining factors in recognizing revenue.

Step-by-step solution

Definition of Assets

The resources maintained and controlled by the business entity that will help generate benefits in the future period are known as assets.

Recognition of revenue by the company

The company will recognize the revenue when the performance obligation of the company is completed. Completion of performance obligation depends upon the control over the asset. Revenue is recognized when the asset is under the control of the customer. The control over the asset is said to be transferred when:

1. The company is eligible to get paid for the asset.
2. The title of the asset has been transferred by the seller.
3. Physical possession of the asset has been transferred to the customer.
4. The customer possesses risk and reward-related to the product.
5. Asset is accepted by the customer.