Directions Read And Respond To The Following Questions

Directionsread And Respond To The Following Questions In the Attached

Read and respond to the following questions in the attached exercise on revenue recognition issues for Survey Monkey. Assume that Black Squirrel Design, Inc., signs up for the Platinum plan at Survey Monkey on December 1, 2015. The customer pays the entire $780 on March 1. How will Survey Monkey record this customer’s payment? What asset and/or liability accounts are affected?

Continue the same example from Item #1. If Survey Monkey has a December 31 year-end, how much revenue related to the Platinum plan purchased by Black Squirrel Design will Survey Monkey recognize at December 31, 2015? How much revenue from the Black Squirrel Design purchase will be recognized during 2016? Provide an argument as to why you agree or disagree.

The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received.

Paper For Above instruction

The issue of revenue recognition has been central to accounting standards and financial reporting, especially in service-based industries like Survey Monkey. Proper recognition ensures that the financial statements accurately reflect the company's economic activities during a particular period. This paper discusses the application of the revenue recognition principle to Survey Monkey's scenario with Black Squirrel Design, Inc., analyzing journal entries, timing of revenue recognition, and the rationale behind these accounting treatments.

Scenario Overview and Initial Recording

In the given scenario, Black Squirrel Design, Inc., subscribes to Survey Monkey’s Platinum plan on December 1, 2015, paying the full amount of $780 on March 1, 2016. Under accrual accounting, revenue recognition depends on whether the revenue has been earned by the end of the reporting period, regardless of when the cash is received. When Black Squirrel Design subscribes in December, the company has entered into a contractual agreement to use Survey Monkey’s services over an agreed period, likely a year. Given this, Survey Monkey must determine when to recognize the revenue in its accounting records.

Recording the Customer’s Payment and Liability Accounts

When the customer makes the payment in March, Survey Monkey will record an increase in cash (an asset account) and a corresponding increase in deferred revenue (a liability account). The journal entry on March 1, 2016, would be:

Dr Cash $780


Cr Deferred Revenue $780

This entry reflects the receipt of cash and the obligation to provide services in the future. The liability, deferred revenue, indicates that the company has not yet earned all of the revenue associated with the payment. As Survey Monkey provides access to its services over time, it will gradually recognize revenue by reducing the deferred revenue account and recording revenue in the income statement.

Revenue Recognition at Year-End (December 31, 2015)

Since the subscription began in December 2015, but the full payment was received only in March 2016, Survey Monkey must assess whether any revenue related to the subscription can be recognized by December 31, 2015. In accordance with the revenue recognition principle, revenue is recognized when earned, which here equates to the period in which services are rendered.

Because the subscription service begins on December 1, 2015, and the company is expected to provide continuous service through December 2016, Survey Monkey should generally recognize revenue on a straight-line basis over the subscription period. However, since the customer paid in March 2016, and no services were rendered in 2015, no revenue is recognized in 2015 related to this subscription. The entire amount remains as deferred revenue until services are rendered, which in this case starts in December 2015 but is mostly earned in 2016.

Revenue Recognition in 2016

In 2016, Survey Monkey will recognize revenue as services are provided. Assuming the subscription covers one year, the revenue recognized per month would be:

$780 / 12 months = $65 per month

From December 2015 through December 2016, the company will recognize $780 in total revenue, with $65 recognized each month. By December 31, 2016, the entire amount will have been recognized, assuming the full subscription period is completed.

Specifically, in 2016, Survey Monkey will recognize revenue for the months of December 2015 (if considered as part of the 2016 fiscal year, depending on cutoff dates) through December 2016, totaling the full $780 since the entire period’s services are rendered.

Arguments Supporting Revenue Recognition Timing

It is essential to adhere to the revenue recognition principle, which stipulates that revenue should be recognized when earned, not necessarily when cash is received. This approach provides a more accurate picture of the company’s financial position and performance. Recognizing revenue in the period services are rendered aligns with the matching principle, ensuring expenses related to delivering those services are also recorded in the same period, facilitating proper profitability analysis.

In this context, deferred revenue is a liability because it represents an obligation to deliver services in the future. Recognizing revenue systematically over the subscription period ensures that financial statements reflect the economic activities of Survey Monkey accurately, complying with GAAP and IFRS standards.

Conclusion

Survey Monkey’s accounting treatment of Black Squirrel Design’s subscription exemplifies the importance of the revenue recognition principle. The initial payment is recorded as deferred revenue upon receipt, and revenue is recognized ratably over the service period as the services are rendered. In doing so, the company aligns revenue recognition with the actual transfer of benefits to the customer, providing transparent and reliable financial information. Strict adherence to these principles safeguards the integrity of financial reporting and aids stakeholders in making informed decisions.

References

  • Financial Accounting Standards Board (FASB). (2014). Revenue from Contracts with Customers (Accounting Standards Update No. 2014-09).
  • International Accounting Standards Board (IASB). (2014). IFRS 15 Revenue from Contracts with Customers.
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