Bonanza Trading Stamps, Inc. was formed untimely this year to sell trading stamps throughout the Southwest to retailers who distribute them free to their customers. Books for accumulating the stamps and catalogs explaining the merchandise for which the stamps may be exchanged are provided free to retailers for distribution to stamp recipients. Centers with inventories of merchandise premiums have been established for redemption of the stamps. Retailers can't return unused stamps to Bonanza.
The subsequent schedule expresses Bonanza's expectations of the percentages of a normal month's activity that will be attained. For this purpose, a normal month's activity is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. The company expects that level may be attained in the third year, and that sales of stamps will average $2,000,000 per month throughout the third year.
a. Describe the factors to be considered in determining when revenue should be recognized in measuring the income of a business enterprise.
b. Describe the accounting alternatives that Bonanza Trading Stamps, Inc. could consider for the recognition of its revenues and related expenses.
c. For each accounting alternative discussed in (2), provide balance sheet accounts that Bonanza should use and show how it should classify each.