Bonanza Trading Stamps, Inc., was formed early this year to sell trading stamps throughout the Southwest to retailers, who distribute the stamps gratuitously to their customers. Books for accumulating the stamps and cat¬ alogs illustrating the merchandise for which the stamps may be exchanged are given free to retailers for distribution to stamp recipients. Centers with inventories of merchandise premiums have been established for redemption of the stamps. Retailers may not return unused stamps to Bonanza.

The following schedule expresses Bonanza's expectations as to the per¬ centages of a normal month's activity that will be attained. For this purpose, a normal month's activity is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. The com¬ pany expects that this level will be attained in the third year and that sales of stamps will average $2 million per month throughout the third year.

Required:

a. Discuss the factors to be considered in determining when revenue should be recognized in measuring the income of a business enterprise.

b. Discuss the accounting alternatives that should he considered by Bonanza Trading Stamps for the recognition of its revenues and related expenses.

c. For each accounting alternative discussed in (b), give balance sheet accounts that should be used and indicate how each should be classified.

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Actual Stamp Month Sales Percentage Merchandise Premium Purchases Stamp Redemptions Percentage Percentage 6 30% 40% 10% 12 60 60 45 18 80 80 70 24 90 90 80 30 100 100 95