After the presentation of your report on the examination of the financial statements to the board of directors of Savage Publishing Company, one of the new directors says he is surprised the income statement assumes that revenue is recognized over the period consistent with the publication of every issue of the company’s magazine. He feels that the “ crucial event” in the process of recognizing revenue in the magazine business is the cash sale of the subscription. 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 Savage Publishing’s accounts with:
1. The cash sale of the magazine subscription
2. The publication of the magazine every month