Your friend Yong has a company making and selling watches with bands that are customized to match university colors. The business started locally, but now has expanded around the world. His strategy is to sell in bulk to small retailers or to alumni clubs in various cities. His banker has just told him he needs to create revenue recognition policy and suggested he begin by considering a few transactions from today.

Yong tells you that today he delivered $1,000 worth of watches to a University bookstore that has been a long time client. They will pay him in a week.

He also received two big orders, one for $700 worth of watches to an established customer and another for $4,000 to a brand new customer in another country where he has never done business. The new customer sent payment in advance. Yong will be able to ship both orders out in the next week. He just needs to finish making a couple of watches for the established customers. He already has all the watches made for the new customer, but wants to inspect them one more time and has to figure out how to ship to that country.

How much revenue should Yong recognize at the end of the day?

3

Yong decided it would be helpful to discuss a couple of other transactions. On a recent trip to Paris, Yong met a street vendor who wanted to sell watches with the colors of various French futball teams. She paid Yong $3,000 in advance for the watches and promised him another $1,000 after she sells them. He did agree to take them back within two months if she found she could not sell them. This is a brand new market for him, so he is willing to take the risk in the hopes it will pay off. Yong shipped her all the watches three days ago. How much revenue should he record?

At the end of Yong's first year of business, he had been owed $70,000 and believed he would collect all but $3,000 of it. It is now the end of his second year of business. He is owed $90,000. Of that amount, $2,000 is from a customer who has told Yong the watches were stolen and they are not sure if they can pay. They are waiting to find out if their insurance will cover it. Yong does not know of any other specific amounts, but said that he expanded into a bunch of new markets, so he is worried that about $5,000 more may not pay.

What amounts should he show on his balance sheet for receivables and on his income statement as an expense for his second year financial statements?