National Bus Lines

National Bus Lines sells passes that allow a passenger unlimited travel on the company$$s buses for $60$

days form the day the pass is first used. The conditions of the pass are as follows:

a$)$ Passes must be purchased at least $90$ days before they are first used

b$)$ Once purchased, the passes are not refundable

c$)$ Passes do not have to be paid for until the date of first use. Approximately $25\%$ of the passes

are paid for when purchased and $75\%$ are paid on date of first use

For example: if a pass is purchased on January $1$st$,$ it cannot be used until April $1$st $(90$ days from date of

purchase$).$ If the customer did not pay for the pass when initially purchased they must pay for it on April

$1$st before the use it for the first time. The pass is then valid for travel between April $1$ May $30(60$ days

from first use$).$

The management of National Bus Lines receives a bonus if the quarterly revenues are greater than the

budget goals. They are not penalized financially if revenues are less than quarterly goals.

Assuming a bus pas sells for $$100$ and $60$ passes are sold on January $1$st$,$ consider the following:

$$ What are possible timing options for revenue recognition based on the case facts?

$$ What criteria should NBL consider in order to recognize the revenue?

$$ Using your professional judgment and applying the revenue recognition criteria $,$ complete the Issue and Analysis Outline and provide a

recommendation on which is the optimal alternative from choices $($A$)$ to $($E$).$

Remember in your analysis$/$implications to answer the following:

$1.$ Is this alternative in accordance with GAAP?

$2.$ Does this alternative meet the user$($s$)$ objective$($s$)?$ If so $$ how, and is earnings management

involved?

$3.$ How does this option affect the financial statements? Discuss.