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PROBLEM 5-1 THE REVENUE RECOGNITION PRINCIPLE LO 1 a. The 6% commission on $150,000, or $9,000, should be recognized on May 1. This is the date on which a sale takes place. It is the date on which the realtor’s client accepts the offer to sell the house. b. Assuming the Chicken King is reasonably assured of collecting the entire fee, it should recognize $10,000 or revenue on March 13. A franchiser must have made “substantial performance” under the agreement to recognize revenue. On this date, Chicken King has provided the service it promised: assistance in selecting a site. c. The franchiser should recognize revenue of $60,000 x 2%, or $1,200, on Juen 30. Under the accrual accounting concept, it has earned the franchise fee on this date, regardless of when the franchisee either reports the amount of sales or remits the fee to Chicken King. Note: Because Chicken King does not receive the report until July 3, it will either need to estimate on June 30 the amount to be received or wait until July 3 to actually make the adjusting entry to accrue revenue. However, the adjusting entry should be dated June 30 and its effect shown in any financial statements prepared as of this date. d. Goldstar should accrue revenue of $300 x 50 ounces. Or $15,000, throughout August as the gold is mined. Under the production method, revenue is recognized at the time of production rather than at the point of sale. The method is appropriate for precious commodities such as gold. The company will have to make an adjustment to recognize an additional $10 per ounce x 50 ounces, or $500 of revenue, on September 5 when the gold is sold. e.
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This note was uploaded on 10/19/2011 for the course ACCT 2241 taught by Professor Cumming during the Spring '11 term at Dalhousie.

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