After the presentation of your report on the examination of the financial statements to the board of directors of the Savage Publishing Company, one of the new directors says he is surprised the income statement assumes that an equal proportion of the revenue is earned with the publication of every issue of the company’s magazine. He feels that the “crucial event” in the process of earning revenue in the magazine business is the cash sale of the subscription. He says that he does not understand why— other than for the smoothing of income—most of the revenue cannot be “recognized” in the period of the sale.
Required
Explain the propriety of timing the recognition of revenue in the Savage Publishing Company’s accounts with
1. The cash sale of the magazine subscription.
2. The publication of the magazine every month.
3. Both events, by recognizing a portion of the revenue with the cash sale of the magazine subscription and a portion of the revenue with the publication of the magazine every month.