Question

Assume the following scenarios. Scenario 1: During 2021, IBM provides consulting services on its mainframe computer for $9,000 on account. The customer does not pay for those services until 2022 Scenario 2: On January 1, 2021, Gold's Gym sells a one year membership for $980 cash. Normally, this type of membership would cost $1,400, but the company is offering a 30%"New Year's Resolution" discount. Scenario 3: During 2021, The Manitowoc Company provides shipbuilding services to the U.S. Navy for $600,000. The U.S. Navy will pay $200,000 at the end of each year for the next three years, beginning in 2021 Scenario 4: During 2021, Goodyear sells tires to customers on account for $13,000. By the end of the year, collections total $10,000. AL the end of 2022, it becomes apparent that the remaining $3,000 will never be collected from customers. Required: For each scenario, calculate the amount of revenue to be recognized in 2021. Revenue recognized in 2021 Scenario 1 Scenario 2 Scenario 3 Scenario 4

Answer 1

Answer :

Scenario 1 : According to Revenue Recognition principle, in case of rendering of services, Revenue should be recognized only when service are provided irrespective of the timing of the receipt of payment. In this case, IBM provides consulting service of 9000 during 2021. Therefore, it should recognized the revenue of $9000 in 2021 irrespective of the fact that the payment was not received untill 2022

Scenario 2 :

Membership cost = $1400

Less : Discount 30% = $420

Revenue $980

In this case' Gold Gym is offering New year resolution discount of 30% on January 1.2021. Therefore discount was known at the time of providing membership. Therefore the company should recognize revenue of $980 in this case because the discount was known at the time of providing membership

Scenario 3

Scenario 1 : According to Revenue Recognition principle, in case of rendering of services, Revenue should be recognized only when service are provided irrespective of the timing of the receipt of payment. In this case, Manitowac company provides shipbuilding service of $600000 during 2021. Therefore, it is should recognize the revenue of $600000 in 2021 irrespective of the fact that the US Navy will pay $200000 at the end of each year for the next three years

Scenario 4

In this case, Good year sells tires to customers for $1300 during 2021. But it receives $10000 by the end of the year. Therefore , Goodyear should recognize $13000 as revenue during 2021 because in 2021,$10000 were collected and $3000 were collectable . By the end of the year 2022, it would be apparent that remaining $3000 will never be collected from customers. Therefore, $3000 would be shown as bad debts in 2022.

	Revenue Recognized in 2021
Scenario 1	$9000
Scenario 2	$980
Scenario 3	$600000
Scenario 4	$13000