Book 2 - Chapter 2

LG 2-4, continued
*Revenue notes:*

a. The Ecology Industries job is not finished , so no revenue can be recognized, even though a cash advance was received.
b. The Daisy Industries job was finished and delivered in December. That is when revenue is earned.
c. The Satisfied Cat Company job was finished and delivered in January. That is when revenue is earned.
d. The teaching contract is different because it is not a single job to be delivered. Revenue on the teaching contract is earned each month as services are performed.
*Expense notes:*

   e.  The computer services are directly traceable to jobs, so this expense has to be recognized in the same
       periods the revenue is recognized from each job. Because no revenue has been recognized from the
       Ecology Industries job, none of the directly traceable expenses to that job are recognized.

f. The office rent is not identifiable with any particular job, so the $900 is assigned to the period
that receives the benefit.

   g.  Office supplies expense: $350 is not yet recognized because it belongs with the Ecology Industries job.
       $200 is recognized in December with the Daisy Industries job. Because no supplies are left, that leaves
       $250 not accounted for ($800 − $550). The remaining $250 is not traceable to any particular job, so the
       $250 is assigned to the period in which it was consumed and provided benefits—December.

h. A telephone bill is not traceable to any particular revenue, so the telephone expense is assigned to the
period in which benefits were received.

LG 2-5.

Revenues	November	December	January
Ecology Industries		$5,000
Satisfied Cat Company job		500	$1,500
Rocky Mountain Learning Company	$500	500	500

Expenses
Computer services		1,900
Office rent	900	900	900
Supplies purchase			800
Telephone expense		100	180

Net Income (Loss)	$(400)	$3,100	$ 120

The cash basis method gives very different results, doesn't it? This is because it ignores when
the revenues were actually earned and when the expenses should be matched against revenues.

Learning Goal 2, continued

SOLUTIONS

Learning Goal 2: Explain the Basic Principles for Recording Revenues and Expenses

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