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.

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

2)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

Per FASB ASC 606-10-05-3: The core principle of the revenue recognition standard is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Per FASB ASC 606-10-05-4: An entity recognizes revenue in accordance with the core principle by applying the following steps: 1. Identify the contract(s) with a customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations in the contract.

5. Recognize revenue when (or as) the entity satisfies a performance obligation

In the given case Mandy moore dance studio wants to record the revenue of $ 10,000 for a contract signed on December 5th. However, the performance obligations related to the contract. Hence the same can't be recorded as revenue.

Q-1) The revenue of $ 10,000 should be recorded only in January as per the above standard.

Q-2) Standard of FASB - ASC - 606

Standard of IASB - IFRS - 15 (Revenue from contracts with Customers)