Applying the Revenue Principle
At what point should revenue be recognized in each of the following independent cases?
Case A. For Christmas presents, a Wendy’s restaurant sells coupon books for $15. Each of the $1 coupons may be used in the restaurant any time during the following 12 months. The customer must pay cash when purchasing the coupon book.
Case B. Russell Land Development Corporation sold a lot to Upland Builders to construct a new home. The price of the lot was $50,000. Upland made a down payment of $250 and agreed to pay the balance in six months. After making the sale, Russell learned that Upland Builders often entered into these agreements but refused to pay the balance if it did not find a customer who wanted a house built on the lot.
Case C. Davis Corporation has always recorded revenue at the point of sale of its refrigerators. Recently, it has extended its warranties to cover all repairs for a period of seven years. One young accountant with the company now questions whether Davis has completed its earning process when it sells the refrigerators. She suggests that the warranty obligation for seven years means that a significant amount of additional work must be performed in the future.