Question

The Challis Medical Center (CMC) is a not-for-profit entity that is interested in attracting a dentist to their area. At this point in time, residents must drive over a hundred miles to the nearest dentist in Ketchum, Idaho. During the winter, road conditions often lengthen the trip to 168 miles. To attract a dentist, CMC will guarantee that gross patient revenues will be at least $120,000 for the first two years of practice in Challis. This guarantee is intended to assure the prospective dentist that his or her lifestyle will not substantially decrease while the new practice develops. The dentist will not be an employee of CMC and will be responsible for all of the operating costs of the business.

The controller for CMC has contacted your accounting firm for advice on recording the guarantee of revenue. The controller believes it is reasonably possible and possibly probable that the new dentist will generate more than the $120,000 each of the first two years. (Keep in mind that CMC is a not-for-profit entity!) Questions Answer all of the following questions:

• Should CMC report the guarantee of revenue? If so, how should it appear in CMC’s financial statements? NOTE: If the guarantee needs to be recorded you do NOT need to include exact numbers. Instead, you need to include a description. For example, recording rent paid would include both a decrease to cash and an increase in expenses.

• If the guarantee must be recognized, when will the information need to be included during the current year or in future years?

***I need to also find the Accounting Standards Codification that links to this problem.***

Answer 1