The federal government, through its various government agencies, engaged in the following transactions involving revenues.
1. It rented land to a tenant; it signed a three-year lease requiring monthly payments of $2,000. In the year in which the lease was signed, the tenant occupied the land for six months but paid an entire year’s rent (i.e., $24,000).
2. It signed two contracts to provide engineering services to a foreign government; each contract was for $50 million. During the year, the federal agency completed 100 percent of one contract and 60 percent of the other. It collected the entire $100 million on cash.
3. It assessed fines of $100,000 each on two firms for polluting waterways. One offender paid the fine; the other notified the government that it would contest the fine in court.
4. It accepted from a private foundation a pledge of $120,000 to fund an exhibit in a government museum. During the year the foundation paid $40,000 of its pledge, promising to pay the balance in the following year. The pledge does not constitute an enforceable legal agreement.
5. As the result of an audit, it assessed a company $250,000 in income taxes for a previous year, the entire amount of which was certain to be collected. In their audit report, the auditors estimated that audits of subsequent years would yield an additional $150,000.
Prepare journal entries to record the transactions. For each entry comment briefly on the amount of revenue recognized.
Cash A/c Dr $24000
To Rental Income A/c Cr $12000
To Unearned revenue A/c or Cr $12000
Income received in advance A/c
Since income earned only for 6 month so revenue to the extent of 6 months is recognized as revenue and other part as unearned which is a liability.
Cash A/c Dr $100 millions
To Revenue A/c Cr $80 millions
To Unearned Revenue (40%) Cr $20 millions
Since the revenue from contracts is calculated on basis of percentage completion method only 60% of cash received is considered as revenue for second contract and remaining 40% as unearned revenue.
Cash A/c Dr $100,000
To Income from Fines A/c $100,000
The fine from first firm entirely taken as revenue because it is collected and certain, whereas from second firm the amount is not certain and shall wait for court decision hence revenue is not recognized.
Pledge Receivable A/c Dr $120,000
To Deferred Revenue A/c (liability) Cr $120,000
Asset of pledge is created on year one.
On receipt of $40,000
Cash A/c Dr $40,000
To Pledge Receivable A/c Cr $40,000
Being amount of $40,000 is recognized as revenue.
Deferred Revenue A/c Dr $40,000
To Revenue A/c Cr $40,000
No entry as to be passed for $80,000 since the certainity of collection of cash in the following year is uncertain.
Cash A/c Dr $250,000
To Revenue A/c $250,000
The amount of $250,000 is certain and the amount of $150,000 is not certain hence not recorded.