Santa's Christmas Tree Farm, a private company reporting under ASPE, grows pine, fir, and spruce trees. The company cuts and sells the trees for cash during the Christmas season. Most of the trees are exported to the United States. The remaining trees are sold to local tree lot operators.
It normally takes about 12 years for a tree to grow to a good size. The average selling price for a mature tree is $48. The owner of Santa's Christmas Tree Farm believes that the company should recognize revenue at the rate of $4 a year ($48 / 12 years) for each tree that it cuts. The biggest cost of this business is the cost of fertilizing, pruning, and maintaining the trees over the 12-year period. These costs average $40 a tree and the owner believes they should also be spread over the 12-year period.
Instructions
Do you agree with the proposed revenue recognition policy for Santa's Christmas Tree Farm? Explain why or why not. Use the revenue recognition criteria to explain your argument for when the revenue should be recognized for this tree-farming business.
Taking It Further
Explain how the costs of fertilizing, pruning, and maintaining the trees should be recorded.