Accrual Concept: Recognition of Expenses and Revenue

1. State the amount of revenue that should be recognized by Garrett Ltd in the year ended 31 December 2019 for each item below, justifying your answer by reference to the revenue definition, recognition and measurement criteria in the IASB Conceptual Framework:

1. Garrett Ltd Service Revenue for 2019 were RM50,000, 90% of which were collected in 2019. Past experience indicates that about 98% of all credit Revenues are eventually collected.
2. Garrett Ltd received RM8,000 cash in advance from a customer in November 2019, for the services to be performed in January 2020.
3. Garrett Ltd started renting out its excess office space on 1 December 2019, on which date the company received RM6,000 cash from its tenant for 4 months rent, in advance.
4. Garrett Ltd received RM10,000 Interest from Bank on January 2019, the Interest was earned on December 2018.
5. Garrett Ltd received a car as settlement for services performed on credit for RM6,000. On the date of sale, the car had a fair value of RM6,500 and a carrying amount in the customers records of RM5,000.

2. Differentiate between cash-basis and accrual-basis accounting.

3. Comparing cash and accrual basis accounting for expenses

Mrs. Singh pays her sons rent in advance. Last November 15th, she paid $1,500 for the rental of her sons room for the weeks beginning Jan 1st until April 16th, 2014. Calculate how much rent expense Mrs. Singh should record on March 31st under.

a. accrual basis? b. cash basis?

4. Comparing cash and accrual basis accounting for revenues

Tariqs Tax Services collect their fees at the end of the completed tax filing for their customers. In some cases, customers do not pay immediately upon receipt of the copy of the filing but request for a quotation and invoice for services after which they might take a month or two to pay. At the end of June, Tariq has collected 60% of the total $4,980 owed by customers for tax services completed.

Calculate how much fees Tariqs Tax Services should record under the

a. cash basis? b. accrual basis?

5. Applying the revenue recognition principle

Takiko Gym collects membership fees quarterly in at the beginning of each quarter. Members thus pay a total amount of $450 in January, April, July and October for three months of monthly membership fees in advance.

Using the Revenue Recognition Principle explain

1. how the fees collected should be recorded as revenue by Takiko Gym.
2. why the unearned revenue is considered a liability?

6. Applying the matching principle

Suppose on January 1, Antonios Tavern prepaid rent of $6,000 for the full year.

At June 30, how much rent expense should be recorded for the period January 1 through June 30?

7. Comparing cash and accrual basis accounting and applying the revenue recognition principle

Momentous Occasions is a photography business that shoots videos at college parties. The freshman class pays $1,000 in advance on March 3 to guarantee services for its party to be held on April 2. The sophomore class promises a minimum of $2,800 for filming its formal dance and actually pays cash of $4,100 on February 28 at the dance.

Answer the following questions about the correct way to account for revenue under the accrual basis:

1. Considering the $1,000 paid by the freshman class, on what date was revenue earned? Did the earnings occur on the same date cash was received?
2. Considering the $4,100 paid by the sophomore class, on what date was revenue earned? Did the earnings occur on the same date cash was received?