Jackson Dunlap is president of New Miami Maintenance, Inc., which provides building maintenance services. On October 15, 2011, Jackson signed a service contract with Western College and Western made a down payment of $12,000. Under the contract, New Miami will provide maintenance services for all Western’s buildings for a period of two years, beginning on January 1, 2012, and Western will pay New Miami $1,000 per month, beginning on January 31, 2012. Initially, Jackson proposed that some portion of the revenue from the contract should be recognized in 2011; however, his accountant, Rita McGonigle, convinced him that this would be inappropriate. Then Jackson proposed that the revenue should be recognized in an amount equal to the cash collected under the contract in 2011. Again, Rita argued against his proposal, saying that generally accepted accounting principles required recognition of an equal amount of contract revenue each month.
Required:
1. Give a reason that might explain Jackson’s desire to recognize contract revenue earlier rather than later.
2. Put yourself in Rita’s position. How would you convince Jackson that his two proposals are unacceptable and that an equal amount of revenue should be recognized every month?
3. If Rita’s proposal is adopted, how would the contract be reflected in the balance sheets at the end of 2011 and at the end of 2012?