Dave's Deep Discount Furniture Store opened for business on October 1, 2012. To promote the store and develop a loyal customer base, customers could buy furniture with no money down and no payments for 12 months. Customers wishing to take advantage of the special promotion were required to pass a thorough credit check. Of the customers from October 1 to December 31, 2012, most of the customers took advantage of the special promotion; the other customers paid for the furniture in full when it was delivered. Total sales from October 1 to December 31, 2012, were $325,000, of which $250,000 was for customers who chose to delay payment for 12 months. Of the remaining $75,000 of sales, $60,000 worth had been delivered to the customers by December 31, 2012, and the remaining $15,000 would be delivered in January 2013. The accountant for the store made the following entry to record the sales.
Accounts Receivable 15,000
Cash 60,000
Sales 75,000
Dave, the owner, disagreed with the accountant and argued that sales revenue of $325,000 should be recorded in 2012.
Instructions
(a) Identify the revenue recognition criteria that must be met before revenue is recorded for the sale of goods.
(b) Identify the critical factors relating to the Dave's Deep Discount Furniture Store's sales transactions that should be considered in determining how much revenue should be recognized.
(c) Indicate the amount of revenue that should be recognized for the period October 1 to December 31, 2012.
Taking It Further
Would your response to (c) be different if the customers were not required to pass a thorough credit check? Explain why or why not.