Question

Allen Company is hired on December 15, 2016 to perform services, beginning on December 16, 2016. Under this agreement, Allen will earn $3,700 monthly and receive payment on January 15, 2017. What amount of service revenue should be recorded for the year ending December 31, 2016

Answer 1

Answer:

The amount that Allen company must recognize is $1850.

Explanation:

The reason is that the Matching Concept says that the revenue earned in the period must match with its expenses. The company has incurred for 15 days till the end of the year 2016. So to match this expense with the revenue we have to consider the time duration for which the service is provided. Here the time duration is 30 days. As the company has incurred expense for 15 days, we will extract a share of total revenue for 15 days which is $1850 ($3700 * 15/30). So Allen must recognize revenue of $1850.

Another explanation is that Accrual Concept says that the revenue must be recognized when they are earned, which means that the company must recognize the share of revenue that the company has delivered its share of consideration. For example if the company has given order for $100,000 material and the company has only sent $50,000 worth of material then the sales must be recorded will be $50,000. And in this case the share of consideration (anything that has monetary value) delivered to its customer is worth 15 days of service at year end. So at the year end the revenue that is coming by offering services for 15 days must be recognized as revenue which is $1850 ($3700* 15/30 days).