Carolina Dubasov enjoyed working with wood. She had a workshop set up in her backyard where she built articles of furniture, including tables, chairs, chests of drawers, end tables, and desks. Every Saturday, she opened her workshop to the public and sold items of furniture that she had completed. Customers paid with cash or credit card. Sometimes customers asked her to make specific articles such as a table and six chairs or a bedroom suite. For these customers, she would draw up the plans. When the customer agrees to the design and the wood, she draws up a contract and receives a 30% down payment. When the furniture is 60% complete, she shows it to the customer and collects another 30%. She collects the final 40% of the contract price when the furniture is completed.
Required:
a. What revenue recognition options are open to Carolina? Which one(s) would you recommend and why?
b. Using your recommended revenue recognition policy, how would you account for all the costs incurred by Carolina?
c. If a customer had signed a contract for a roll-top desk, paid the 30% down payment, and then decided he did not want the desk, should Carolina return the 30% down payment? Why or why not? How can she protect her business from this possibility?