Question

Mandy Moore Dance Studio wishes to expand her dance studio and the bank has loaned her $100,000. The bank requires the business to maintain a current ratio of no less than 1.50. The expansion of the dance studio has been solid but not as well as expected. Due to the expansion, the current ratio is 1.40 as of December 15th. In reviewing the books, there is a contract for $10,000 which was signed on December 5th, but the dance studio will not earn the money until January. In order to raise the current ratio, Mary is thinking of recording this as revenue in December.

By recording the revenue in December, determine the accounting principle that would dictate when the revenue should be recognized.

Identify the standard the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have issued and how it pertains to this situation.

Answer 1

Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) jointly issued Accounting Standards Codification (ASC) 606 , which is related to revenue from contracts with customer . There are five steps in the process of revenue recognition according to them :-

1 . Identify the contract

2. Identify the contractual performance obligation

3. Determine the amount of consideration

4. Allocate determined amount of consideration to the contractual obligations

5. Recognize revenue as and when performing party satisfies a performance obligation.

In the given case , performance obligation with respect to the contract amounting to $10000 is to provide the dancing classes and the dance studio will not earn the money till January. Hence condition mentioned in ASC 606 is not fulfilled. Thus, it will not be appropriate to record the revenue in December.

Answer 2

Mandy Moore Dance Studio wishes to expand her dance studio and the bank has loaned her 100000 dollars