Summary Business Accounting

Question:

On May 28, Markal Company purchased a tooling machine from Arens and Associates for $1,000,000

payable as follows: 50 percent at the transaction closing date and 50 percent due June 28. The cost of the

machine to Arens is $800,000. Markal paid Arens $500,000 at the transaction closing date and took

possession of the machine. On June 10, Arens determined that a change in the business environment has

created a great deal of uncertainty regarding the collection of the balance due from Markal, and the

amount is probably uncollectible. Arens and Markal have a fiscal year-end of May 31. The revenue

recognized by Arens and Associates on May 28 is

a. $200,000

b. $800,000

c. $1,000,000

d. $0



Answer:




c. Revenue is recognized when (1) realized or realizable and (2) earned. On May 28,

$500,000 of the sales price was realized while the remaining $500,000 was realizable in the form of a

receivable. The revenue was earned on May 28 when the title of the goods passed to the purchaser.

The cost-recovery method is not used because the receivable was not deemed uncollectible until June

10.