Enchanted Brides Ltd. sells complete bridal ensembles. The most expensive part of the ensemble is the wedding gown. Recognizing that some of its customers may not have enough immediate funds to purchase one of its gowns, the store provides a layaway plan. The customer selects a gown and the store agrees to hold the gown until it is paid for. The store sets up a monthly payment schedule for the customer, extending the payment time over six months to a year. The store charges an additional $35 layaway application fee and $100 in possible default charges. If all payments are made on schedule, the default charge reduces the final payment. If the customer defaults, the $100 is not refunded.
Required:
Using the revenue recognition criteria, explain how the store should account for the monthly payments from the customer. Should the $35 storage fee be treated as revenue? Why or why not? Should the $100 default charge be treated as revenue? Why or why not? When should the store recognize the original cost of the wedding gown?