Question:
Each of the following situations concerns revenue recognition for services.
1. Delta Airlines books a reservation for a roundtrip flight to Orlando for Ming Tsai on April 12. Delta
charges the $425 to Tsai’s Visa card on April 13 and receives the cash from Visa on May 1. The roundtrip
flight commences on May 15. The ticket is nonrefundable.
2. Highlife Ski Resort in Colorado sells a season pass to Larry Werner on October 15. Highlife usually
opens its season just after Thanksgiving and stays open until approximately April 30.
3. Dixon Management requires tenants to sign a three-year lease and charges $5,000 per month for one
floor in its midtown high-rise. In addition to the monthly fee, payable at the beginning of each month,
tenants pay a nonrefundable fee of $12,000 to secure the lease.
4. Janora Hawkins, attorney, agrees to accept an accident victim’s case. Hawkins will be paid on a
contingency basis. That is, if she wins the case, she will receive 30% of the total settlement. The case
commences on July 15 and is settled successfully on August 28. On September 15, Hawkins receives her
contingency payment of $60,000.
Required:
For each of the above situations, determine the appropriate timing of revenue recognition.
Answer:
1. Delta should recognize the $425 as revenue on May 15, the date the flight
commences.
2. Revenue should be recognized evenly over the period beginning after
Thanksgiving and ending April 30.
3. The $5,000 monthly charge is recognized as revenue each month. The
$12,000 fee must be recognized evenly over the 36-month lease period.
Each of the following situations concerns revenue recognition for services.
1. Delta Airlines books a reservation for a roundtrip flight to Orlando for Ming Tsai on April 12. Delta
charges the $425 to Tsai’s Visa card on April 13 and receives the cash from Visa on May 1. The roundtrip
flight commences on May 15. The ticket is nonrefundable.
2. Highlife Ski Resort in Colorado sells a season pass to Larry Werner on October 15. Highlife usually
opens its season just after Thanksgiving and stays open until approximately April 30.
3. Dixon Management requires tenants to sign a three-year lease and charges $5,000 per month for one
floor in its midtown high-rise. In addition to the monthly fee, payable at the beginning of each month,
tenants pay a nonrefundable fee of $12,000 to secure the lease.
4. Janora Hawkins, attorney, agrees to accept an accident victim’s case. Hawkins will be paid on a
contingency basis. That is, if she wins the case, she will receive 30% of the total settlement. The case
commences on July 15 and is settled successfully on August 28. On September 15, Hawkins receives her
contingency payment of $60,000.
Required:
For each of the above situations, determine the appropriate timing of revenue recognition.
Answer:
1. Delta should recognize the $425 as revenue on May 15, the date the flight
commences.
2. Revenue should be recognized evenly over the period beginning after
Thanksgiving and ending April 30.
3. The $5,000 monthly charge is recognized as revenue each month. The
$12,000 fee must be recognized evenly over the 36-month lease period.
