(Recognition of Revenue—Bonus Dollars) Alexei & Nemov Inc. was formed early this year to sell merchandise credits to merchants who distribute the credits free to their customers. For example, customers can earn additional credits based on the dollars they spend with a merchant (e.g., airlines and hotels). Accounts for accumulating the credits and catalogs illustrating the merchandise for which the credits may be exchanged are maintained online. Centers with inventories of merchandise premiums have been established for redemption of the credits. Merchants may not return unused credits to Alexei & Nemov.

The following schedule expresses Alexei & Nemov’s expectations as to percentages 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 company expects that this level will be attained in the third year and that sales of credits will average $6,000,000 per month throughout the third year.

Alexei & Nemov plans to adopt an annual closing date at the end of each 12 months of operation.
Instructions

(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 be considered by Alexei & Nemov Inc. 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 Credit Sales Merchandise Credit Premium Purchases Month Percent Percent Redemptions Percent 6th 30% 40% 10% 12th 60 60 45 18th 80 80 70 24th 90 90 80 30th 100 100 95