1. Explain the revenue recognition rules for each firm. As part of your explanation, prepare journal entries for each described method.
2. For each firm, are the revenue recognition methods described in the note reasonable? Explain in detail.
3. In most cases, IFRS accounting rules provide only general revenue recognition guidelines. For each firm, discuss whether detailed revenue recognition rules are needed.
By 2008, U.S. Generally Accepted Accounting Principles (GAAP) included more than 200 different revenue recognition guidelines, rules, and regulations. The most straightforward sale is a retail sale for cash, such as a consumer paying cash for groceries. There is a slight chance the customer will return the goods because they are unsatisfactory, but in most cases there is clearly a sale. There is no uncertainty about the price, no uncertainty about whether the customer will pay for the purchase, no uncertainty about whether the customer has taken possession of the goods, and very low probability that the goods will be returned. The store would almost certainly recognize revenue on the date the transaction occurred by debiting cash and crediting revenue.
As business became more complicated, so did revenue recognition. Transactions involving multiple elements are common. A computer manufacturer may sell a package of hardware, software, warranties, and telephone support. It is unclear how a one-time initial payment should be allocated among those four elements and un-clear how an initial payment—combined with a monthly fee over some period—should be allocated between the four elements.