Bonanza Trading Stamps, Inc., was formed early this year to sell trading stamps throughout the Southwest to retailers, who distribute the stamps free to their customers. Books for accumulating the stamps and catalogs illustrating the

38. R. K. Elliott and J. J. Willingham, Management Fraud: Detection and Deterrence (New York: Petrocelli Books, 1980). merchandise for which the stamps may be exchanged are given free to retailers for distribution to stamp recipients. Centers with inventories of merchandise premiums have been established for redemption of the stamps. Retailers may not return unused stamps to Bonanza. 

The schedule below expresses Bonanza’s expectations of the percentages of a normal month’s activity that will be attained. For this purpose, a normal month’s activity is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. Bonanza expects to attain this level in the third year and to average $ 2 million per month in stamp sales throughout the third year.

Required: 

a. Discuss the factors to be considered in determining when revenue should be recognized in measuring the income of a business enterprise. 

b. Discuss the accounting alternatives that should be considered by Bonanza Trading Stamps for the recognition of its revenues and related expenses. 

c. For each accounting alternative discussed in (b), give balance sheet accounts that should be used and indicate how each account should be classified.

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Merchandise Premium Purchases Stamp Redemptions Actual Stamp Sales (%) 30 60 80 90 100 Month 12 18 24 30 40 60 80 90 100 10 45 70 80 95