(L.O. 7) Pluto Magazine Company sells space to advertisers. The company requires an advertiser to pay for services one month before publication. Advertising revenue should be recognized when:

a. an advertiser places an order.

b. a bill is sent to an advertiser.

c. the related cash is received.

d. the related ad is published.

Approach and Explanation: Read the last sentence of the stem. We want to know the point at which revenue should be recognized. Write down what you know from the revenue recognition principle.

Revenue is generally recognized when (1) realized or realizable, and (2) earned. Read the stem and think of how to apply the revenue recognition principle to the facts given. At the points when an order is placed and a bill is sent to an advertiser, revenue has neither been realized nor earned. At the point when the cash is received in advance of the publication, the revenue is realized but not earned. The revenue is earned when the related ad is published and, thus, should be recognized then. (Solution = d.)