Tag: Revenue Recognition

Revenue recognition

Posted on | by Brian Leakey

Q1: SWA
How does SWA account for its frequent flyer program? Does this accounting make sense to you?
In 2020, SWA recognized passenger revenues of $7,665m (noted in Case). What percentage of ticket sales for that year were deferred? Given your answer,
how significant are the costs of the program?
Q2: MP
Please outline the principles of revenue recognition? List these in bullet points or in a table.
Drawing on these principles, when should MP be allowed to recognize revenue on the Amgen contract?
A. When it signs the contract
B. When it receives cash
C. During the contract term, or
D. When the contract is completed
Why did you choose A, B, C or D above?

  1. Given the method of reporting used, what transactions would have been recorded in relation to the contract when it was signed and at the end of 2018?
  2. In 2019, the company announced that completion of the project would take longer than anticipated, and that it would use the percentage completion method to allocate the deferred revenues over time, rather than straight-line. Conceptually, how does each method work? Which method makes more sense to you? Why?

Revenue Recognition

Posted on | by

 

 

One of the most important decisions in accounting is to know when to recognize revenue. Understanding the revenue recognition criteria and how they apply helps you understand when revenue should be earned.

Think about the business in which you work. How would revenue be recognized in your industry? In what type of industries would a company have to wait to report revenue even though the payment or valid promise of payment might be received early?

Consider the following examples:

A long-term construction company (such as one that builds highways)
A fitness center where membership dues are paid upfront and quarterly
Select one example and respond to the following in a minimum of 175 words:

When do you think revenue would be recognized?
When would the two revenue recognition criteria be met?
What is the risk to users of financial statements if revenue is recognized too early?
Discuss the difference between overstatement and understatement of revenues.