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Smith Brothers Outdoor Adventures: Proper revenue reporting

Bob and Tom Smith, owners of Smith Brothers Outdoor Adventures, are planning to add an outdoor adventure camp for children to the line of services they provide. Their plan includes requiring the parents to pay a non-refundable deposit of half the tuition fees to hold their child's place in the camp. The remaining tuition can by paid using two options. Option 1 requires the remaining tuition to be paid upon the child's arrival at camp. Option 2 allows the parents to spread the remaining one-half of the tuition over the total camp time, with payments due every other Friday. This option adds an additional fee of $100 to the tuition to offset the risk and the processing costs.

How should the deposits be recorded? How should the tuition fees be recorded under Option 1? Option 2? How should the additional $100 processing fees be recorded? What if the parents don't make the biweekly payments? How should Bob and Tom record unpaid tuition fees?

Solution Preview

Following are two excellent sources which explain in detail about the revenue recognition principle and the matching principle:

http://beginnersinvest.about.com/od/gaap/a/aa0605.htm
http://www.sec.gov/interps/account/sab101.htm.

First, I should list the assumptions under which the responses are calculated:

1. Smith Brothers Outdoor Adventures uses the accrual basis of accounting.
2. Tax basis would calculate totally different amounts and will NOT be discussed.

Facts about the problem:

1. Non-refundable deposits are earned when received (because they will never be refunded regardless of cancellation or other factors.
2. Revenue is reported when earned, not when received. It is a liability until it is earned because it is a prepayment.
3. The deposit equals one-half of the total tuition fees.
4. Option 1 is a full prepayment of the remaining 50% of the total fee.
5. Option 2 spreads the remaining 50% payment over the period of ...

Solution Summary

The 600+ word solution carefully answers each question with a paragraph of explanation which all demonstrate revenue recognition principles.

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