Help !! Revenue Recognition


J

Jason Rich

I need help on understanding how RR works in this situation.

Contract is for 3 months (Jan-05, Feb-05,Mar-05) plus an additional
free month (Apr-05).
Monthly fees of $300 per month.
Start date is 05-JAN-05

Without the free month, The monthly fees gets recognized on this
structure.
05-JAN-05 to 31-JAN-05
01-FEB-05 to 28-JAN-05
01-MAR-05 to 31-MAR-05

Now can you help me get the amounts and dates for the monthly fees
revenue with the FREE MONTH(Apr-05).

Thanks a lot in advance and I will eagerly waiting to get your opinion
and input.
 
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P

Paul A. Thomas

Jason Rich said:
I need help on understanding how RR works in this situation.

Contract is for 3 months (Jan-05, Feb-05,Mar-05) plus an additional
free month (Apr-05).
Monthly fees of $300 per month.
Start date is 05-JAN-05

Without the free month, The monthly fees gets recognized on this
structure.
05-JAN-05 to 31-JAN-05
01-FEB-05 to 28-JAN-05
01-MAR-05 to 31-MAR-05

Now can you help me get the amounts and dates for the monthly fees
revenue with the FREE MONTH(Apr-05).

Thanks a lot in advance and I will eagerly waiting to get your opinion
and input.


If you are on the cash basis of accounting, you are done. Nothing gets
recorded for April, as that is what your revenue is.

Under an accrual method of accounting though, you probably should record $75
in revenues earned in each month.

The terminology in the contract might cause me to change my mind on the
exact entries though.
 
J

Jason Rich

Thanks for responding, Paul.

It is accrual method of accounting here. What intrigued me to ask this
question was the way Revenue being recognized here in a different way.
I have the example and calcuation and let me just put those numbers
here rightaway.

Assuming it is a simple contract with not much terminology, here is how
it is...

Start Date : 02-NOV-04, DEC-04, JAN-05)
Term : 3 months (NOV-04, DEC-04, JAN-05)
Free Month : 1 month (FEB-05)
Monthly Fee : $800

The way the revenue (monthly fee ) is recognized here is as shown below

Month Monthly Fee : Reevenue Recognized
Nov-2004 $800 580 (rest deferred to
Free Month)
Dec-2004 $800 20(from Nov-04) + 580 =
600(rest to FM)
Jan-05 $800 20(from Dec-04) +
580 = 600 (rest to FM)

Now, the free month Feb05
20 (from JAN-05)
+ 200
+ 200
+200
------
620
-----

I can see something wrong in there,, but cannot point out what the
right one could be.

Please advice
Thanks again
Jason
 
D

David Jensen

Thanks for responding, Paul.

It is accrual method of accounting here. What intrigued me to ask this
question was the way Revenue being recognized here in a different way.
I have the example and calcuation and let me just put those numbers
here rightaway.

Assuming it is a simple contract with not much terminology, here is how
it is...

Start Date : 02-NOV-04, DEC-04, JAN-05)
Term : 3 months (NOV-04, DEC-04, JAN-05)
Free Month : 1 month (FEB-05)
Monthly Fee : $800

The way the revenue (monthly fee ) is recognized here is as shown below

Month Monthly Fee : Reevenue Recognized
Nov-2004 $800 580 (rest deferred to
Free Month)
Dec-2004 $800 20(from Nov-04) + 580 =
600(rest to FM)
Jan-05 $800 20(from Dec-04) +
580 = 600 (rest to FM)

Now, the free month Feb05
20 (from JAN-05)
+ 200
+ 200
+200
It probably would have made more sense to recognize $600 in November,
even though there was one day missing, since you don't seem to make it
up later. If you are going to recognize on a daily basis (which doesn't
really work since you have 119 days instead of 120), you could do your
revenue recognition at $20.00 per day ($580, 620, 620, 560, 20 which
would imply that the free month ends on March first. For one instance of
$20, there is no reason to bother, just take the rest of it on
February.)
 
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B

Beverly

Thanks for responding, Paul.

It is accrual method of accounting here. What intrigued me to ask this
question was the way Revenue being recognized here in a different way.
I have the example and calcuation and let me just put those numbers
here rightaway.

Assuming it is a simple contract with not much terminology, here is how
it is...

Start Date : 02-NOV-04, DEC-04, JAN-05)
Term : 3 months (NOV-04, DEC-04, JAN-05)
Free Month : 1 month (FEB-05)
Monthly Fee : $800

The way the revenue (monthly fee ) is recognized here is as shown below

Month Monthly Fee : Reevenue Recognized
Nov-2004 $800 580 (rest deferred to
Free Month)
Dec-2004 $800 20(from Nov-04) + 580 =
600(rest to FM)
Jan-05 $800 20(from Dec-04) +
580 = 600 (rest to FM)

Now, the free month Feb05
20 (from JAN-05)
+ 200
+ 200
+200
------
620
-----

I can see something wrong in there,, but cannot point out what the
right one could be.

Please advice
Thanks again
Jason
Think of it in terms of entries.

Nov. Cash (debit) 800
Revenue (credit) 600
Unearned Revenue (credit) 200

Dec. Cash (debit) 800
Revenue (credit) 600
Unearned Revenue (credit) 200

Jan. Cash (debit) 800
Revenue (credit) 600
Unearned Revenue (credit) 200

Feb. Unearned Revenue (debit) 600
Revenue (credit) 600


I wouldn't pro-rate November since the free month is February... not
until March 2.
 

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