Question

GM signs a contract to deliver 10 bytes to Houston Metro. Under the contract, Metro makes a cash payment of 4 million to GM and the 10 buses are shipped immediately in the same contract, GM obtain the right to advertise is products on Metro buses for a year. The fair value of the advertising service is $20,000. GMS revenue recognition entry will include

Answer 1

Answer : (c) credit sales revenue of 4020000 dollars

Above answer is explained below in detail:

Under the revenue recognition concept revenue is considered to have been realised when a transaction has been entered into and the obligation to receive the amount is established.

This principle is mainly concerned with the revenue being recognised in the income statement of enterprise. Recognising the revenue means recording the transaction and recording the income in income statement.

So as per given question revenue of GM includes sales revenue plus advertising right to be sold as per the contract. So the advertising service revenue will be considered as revenue under revenue recognition concept. When revenue is recognised it was placed as credit to sales revenue in journal entry. Therefore we need to record the entry which include credit to sales revenue of 4020000 dollars.

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