Review the revenue recognition practices of the following companies, and indicate at what point in time revenue should be recognized in each of these independent cases. Explain your answer.
Case A. The sales representatives of Computec Corporation are under intense pressure to achieve very high sales levels. To achieve their specific objectives, the sales representatives ask customers to order computer equipment in advance, with payment to be made later. In many cases, the company records sales on the basis of customers’ orders, even though the ordered equipment may not have been manufactured yet.
Case B. Scenic Trails Inc. is a campground operator that sells annual memberships to campers. Members are allowed to pay the annual membership fees over a period of six months. The company records revenue from membership fees as soon as a new member signs the membership agreement. Members are allowed 10 days to cancel their memberships, and many members cancel their memberships within days of signing.
Case C. Educational Toys Inc. sells a wide variety of toys to distributors and allows them to return unsold merchandise within a period of three months. The company’s policy encourages distributors to buy products and keep them for three months, knowing they could return any unsold merchandise during this period. The company recognizes revenue as soon as it delivers its products to distributors.