Urgent Accounting Help

V. Revenue Recognition

Part A.

Use the information below to answer the questions in Part A.

SmithAd Corp. is a software company that helps small companies set up their websites.

On Dec. 31, Year 1, SmithAd sells $3,000 of Advertising 1.0,

On Dec. 31, Year 2, SmithAd sells $2000 of Advertising 1.0.

On Dec. 31, Year 3, SmithAd sells $1000 of Advertising 1.0.

Assume 40% of revenue is deferred and recognized ratably on a straight-line basis over a two-year product life cycle (starting from the date of sale, i.e., Dec. 31). Note that the sales are made on 12/31, at the end of each year.

Required:

1) Complete the table below for Year 1 to 3. (9 points) Year 2 $2000 Year 3 $1000 Customer Purchases Sales revenue recognized for current year sales Sales deferred as unearned revenue Recognition of unearned revenue from previous years Total sales revenue recognized on the I/S Year 1 $3000 1800 1200 0 2) Why do companies like Microsoft have incentives to adopt a deferred revenue recognition policy (e.g., defer 20% of revenue and recognize over the product life cycle To report higher profit To smooth revenue stream To report higher operating cash flow Supposed Groupon sold 1,000 of the following groupon; Smith Store $10 for $20 worth of merchandize Assume Groupon receives 30% commission for this groupon. If Groupon uses the gross method instead of the net method to account for this sale, would its revenue be higher or lower? By how much? (3 points) by $