SPECIALIZED MASTERS – CORE COURSES

Introduction to Financial Accounting

Schultz
Solution

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(a) DPS Business School Inc. (DPSBS Inc.) invoices its students at the beginning of each
quarter for the quarterly tuition fees. DPSBS Inc. recognizes revenue only when tuition is
actually paid by the students (or whomever, on their behalf). The first quarter X2 tuition
invoices were mailed on 1 December X1 and all the tuition fee payments have been
received in full by 15 December X1. No adjusting entry has been recorded.

Revenues should be recognized when earned and not when cash is received. Even if the
tuition fees have been paid in X1 (cash increase), the revenue belongs to the year X2
(Prepaid or Deferred revenue)

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(b) Merseyside Ship-building receives an order to build a cargo ship. The work starts on July
1 20X2. At 31 December 20X2 the ship is 10% complete, and at the end of next year is 80%
complete. The ship leaves the yard in April 20X4. During this period Merseyside Ship-building
received the following payments: 20 Million EUR in 20X2, 60 Million EUR in 20X3 and 20
Million in 20X4. The estimated cost of the ship is 80 Million EUR. Revenue is recognized
upon completion and delivery of the ship.

Completed-contract vs percentage of completion method

Here it should be rather the percentage of completion method (revenue, related costs and
progress can be measured reliably)

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(c) A bridge club invoices a membership fee to its members who receive in return the
magazine ‘Bridge Forever’ and are entitled to specially discounted prices on other
magazines produced by the same publisher. The club, in order to simplify its recording of
fees, spreads the fee revenue on a straight-line basis over the period of membership.

OK

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(d) A seller (shipper) transfers goods to a buyer (recipient) who undertakes to sell the
goods on behalf of the seller (consignment sales). The shipper recognizes the revenue at
the time of delivery to the buyer.

NO, the revenue should be recorded when products are sold by the recipient (consignee),
i.e. transfer of risks. If the goods are not sold, they will be returned to the seller and hence
no profit should be recognized.

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