Javier Hernandez had seen many signs advertising house painters during the previous summers. Between his third and fourth year of university, he decided that he would start a painting company so that he could earn enough money to pay his tuition in the fall. He talked with a fellow student who ran a business like this the previous summer and knew the rates that he could charge. He made the following decisions: When he had a customer sign a contract for the inside or outside painting of a house, he would ask for a 20% down payment.
The remainder of the contract price would be required when the job was completed. He made a deal with a local paint supplier for a discount on paint and other supplies. He assumed that most of the brushes and other painting supplies would be worth very little by summer’s end, but he would sell off other supplies, such as ladders, when summer ended. If he needed a piece of equipment to do a job that he would likely not need again, he would rent it. His parents provided him with $500 in start-up money that needed to be repaid when he closed his business.
Required:
a. What revenue recognition options are open to Javier? Which one would you recommend and why?
b. Using your recommended revenue recognition policy, how would Javier account for all the costs for his various contracts?
c. How should he account for the original loan that he received from his parents?