Homework Solutions Chapter 2 - 5.doc - Session 1 Five statements balance sheet/Income statement/statement of cash flow/change of equity/notes Income

Homework Solutions Chapter 2 - 5.doc - Session 1 Five...

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Session 1 Five statements: balance sheet/Income statement/statement of cash flow/change of equity/notes Income statement: most important operating Income;bottom line: net income Statement of cash flows: most important cash from operation Balance sheet:permanent income statement:temporary A=L+E A=L+PIC+RE+R-E Solutions to recommended homework, Chapters 2 – 5 CA 2.5 CA2.5 (LO4) (Revenue Recognition Principle) After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the revenue is earned with the publication of every issue of the company's magazine. She feels that the crucial event in the process of recognizing revenue in the magazine business is the cash sale of the subscription. She says that she does not understand why most of the revenue cannot be recognized in the period of the sale. Instructions Discuss the propriety of timing the recognition of revenue in Piper Publishing's accounts with respect to the following. a. The cash sale of the magazine subscription. b. The publication of the magazine every month. c. Both events, by recognizing a portion of the revenue with the cash sale of the magazine subscription and a portion of the revenue with the publication of the magazine every month. (a) The “crucial event” in determining when revenue is recognized is when a performance obligation is satisfied. In the case of subscriptions, the performance obligation is met when the magazines are delivered (including ads contained therein). The new director suggests
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that this principle does not apply in the magazine business and that revenue from subscription sales and advertising should be recognized in the accounts when the difficult task of selling is accomplished and not when the magazines are published and delivered to fill the subscriptions or to carry the advertising. The director’s view that there is a single crucial event in the process of earning revenue in the magazine business is questionable even though the amount of revenue is determinable when the subscription is sold. Although the firm cannot prosper without good advertising contracts and while advertising rates depend substantially on magazine sales, it also is true that readers will not renew their subscriptions unless the content of the magazine pleases them. Unless subscriptions are obtained at prices that provide for the recovery in the first subscription period of all costs of selling and filling those subscriptions, the editorial and publishing activities are as crucial as the sale in the earning of the revenue. Even if the subscription rate does provide for the recovery of all associated costs within the first period, however, the editorial and publishing activities still would be important since the firm has an obligation (in the amount of the present value of the costs expected to be incurred in connection with the editorial and publication activities) to produce and deliver the magazine. Not until this
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