RECOGNITION OF SERVICE CONTRACT REVENUE Jackson Dunlap is president of New Miami Maintenance Inc. which provides building maintenance services. On October 15, 2009, Mr. Dunlap signed a service contract with Western College. Under the contract, New Miami will provide maintenance services for all of Western’s buildings for a period of two years, beginning on January 1, 2010, and Western will pay New Miami on a monthly basis, beginning on January 31, 2010. Although the same amount of maintenance services will be rendered in every month, the contract provides for higher monthly payments in the first year.

Initially, Mr. Dunlap proposed that some portion of the revenue from the contract should be recognized in 2009; however his accountant, Rita McGonigle, convinced him that this would be inappropriate. Then Mr. Dunlap proposed that the revenue should be recognized in an amount equal to the cash collected under the contract in 2009. Again, Ms. McGonigle argued against his proposal, saying that generally accepted accounting principles required recognition of an equal amount of contract revenue each month.

Required:

. Give a reason that might explain Mr. Dunlap’s desire to recognize contract revenue earlier rather than later.

. Put yourself in the position of Rita McGonigle. How would you convince Mr. Dunlap that his two proposals are unacceptable and that an equal amount of revenue should be recognized every month?

. If Ms. McGonigle’s proposal is adopted, how would the contract be reflected in the balance sheets at the end of 2009 and at the end of 2010?

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