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Recognizing Revenue after Delivery of Goods

When a sale of goods transaction carries a high degree of uncertainty regarding


collectibility, a company must defer the recognition of revenue. In this situati
on, revenue is not recognized at point of sale or delivery. There are three meth
ods that recognize revenue after delivery has taken place: .
Service Delivery
Delivery of goods or service may not be enough to allow for a business to recogn
ize revenue on a sale if there is doubt that the customer will pay what it owes.
The installment sales method recognizes income after a sale or delivery is made;
the revenue recognized is a proportion or the product of the percentage of reve
nue earned and cash collected. The unearned income is deferred (recorded as a li
ability) and then recognized to income when cash is collected. For example, if a
company collected 45% of a product's sale price, it can recognize 45% of total
revenue on that product. The installment sales method is typically used to accou
nt for sales of consumer durables, retail land sales, and retirement property.
The cost recovery method is used when there is an extremely high probability of
uncollectable payments. Under this method, no revenue is recognized until cash c
ollections exceed the seller's cost of the merchandise sold. For example, if a c
ompany sold a machine worth $10,000 for $15,000, it can start recognizing revenu
e when the buyer has made payments in excess of $10,000. In other words, each do
llar collected greater than $10,000 goes towards the seller's anticipated revenu
e on the sale of $5,000.
The deposit method is used when a company receives cash before transfer of owner
ship occurs. Revenue is not recognized when cash is received because the risks a
nd rewards of ownership have not transferred to the buyer. The seller records th
e cash deposit as a deferred revenue, which is reported as a liability on the ba
lance sheet until the revenue is earned. For example, sales of magazine subscrip
tions utilize the deposit method to recognize revenue. A deferral is recorded wh
en a seller receives a subscriber's payment on the subscription; cash is debited
and deferred magazine subscriptions (a liability account) is credited. As the d
elivery of the magazines take place, a portion of revenue is recognized, and the
deferred liability account is reduced for the amount of the revenue.

Source: Boundless. Calculating Values for Fractional Time Periods. Boundless Accou
nting. Boundless, 21 Jul. 2015. Retrieved 25 Sep. 2015 from https://www.boundles
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-10/additional-detail-on-present-and-future-values-68/calculating-values-for-fra
ctional-time-periods-316-1470/
Source: Boundless. Loans and Loan Amortization. Boundless Accounting. Boundless, 2
1 Jul. 2015. Retrieved 25 Sep. 2015 from https://www.boundless.com/accounting/te
xtbooks/boundless-accounting-textbook/the-time-value-of-money-10/additional-deta
il-on-present-and-future-values-68/loans-and-loan-amortization-315-1471/
Source: Boundless. Comparing Interest Rates. Boundless Accounting. Boundless, 21 J
ul. 2015. Retrieved 25 Sep. 2015 from https://www.boundless.com/accounting/textb
ooks/boundless-accounting-textbook/the-time-value-of-money-10/additional-detailon-present-and-future-values-68/comparing-interest-rates-318-1469/
Source: Boundless. Recognition of Revenue After Delivery. Boundless Accounting. Bo
undless, 21 Jul. 2015. Retrieved 25 Sep. 2015 from https://www.boundless.com/acc
ounting/textbooks/boundless-accounting-textbook/detailed-review-of-the-income-st
atement-13/revenue-recognition-85/recognition-of-revenue-after-delivery-389-3746

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