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3. Many would argue that the service involved is the cruise and that
no revenue has been earned until the cruise has been completed.
Others maintain that Raymonds has completed its service of
arranging the cruise, that it is extremely unlikely that events will
happen in 2007 that will change its profit of $20,000, and that the
amount is therefore revenue in 2006. Introduction of the possibility
of a refund lessens the strength of the argument of the latter group.
This position can be weakened further by asking: (a) What if
passengers are dissatisfied and demand (or sue for) a refund? (b)
What if the ship owner performs unsatisfactorily and Raymonds, in
order to protect its reputation, steps in and incurs additional food or
other cost to make the passengers happy? Students should be
reminded to consider two criteria: (1) that the agency has
substantially performed its earning activities and (2) that the
income is reliably measurable.
4. This problem has been debated for many years. Some argue that
the $4 per tree has already been earned, as evidenced by the firm
offer to buy the trees, and that it would be misleading to show no
revenues in 2006 and the full sales value when the trees are sold in
2007. The percentage-of-completion method can be used as an
analogy. Others argue that there has been no transaction, and no
assurance that the trees can be sold for more than $4 in 2007
because market prices may decrease, or pests or fire may destroy
them. Typically, firms facing this issue recognize no revenue until
harvesting the trees.
5. If a professional service firm (architects, engineers, consultants,
lawyers, accountants, and so on) values its jobs in progress at billing
rates, then it is recognizing revenue as the work is performed (time
applied to projects) rather than waiting until the customer is billed.
This is certainly defensible if the firm has a contract (called a time
and materials contract) that obligates the client to pay for all time
applied to the clients project: the critical act of performance is
spending the time on the project, not billing that time. In fact, many
such firms feel that even with fixed-fee contracts, the critical
performance task is spending time on a project as opposed to
delivering some end item to the client; they thus record jobs in
progress at estimated fee, which would be the same as billing rates
for the time applied provided the project is within its professionalhour budget. Of course, whether the revenue is recognized when
the time is applied or when the client is billed does make a
difference in owners equity. Retained earnings will reflect the