Recognizing Revenue
HealthCare, Inc.,* operates a number of medical testing facilities around the United States. Drug manufacturers, such as Merck and Bristol-Myers Squibb, contract with HealthCare for testing of their newly developed drugs and other medical treatments. HealthCare advertises, gets patients, and then administers the drugs or other experimental treatments, under a doctor's care, to determine their effectiveness. The Food and Drug Administration requires such human testing before allowing drugs to be prescribed by doctors and sold by pharmacists. A typical contract might read as follows:
HealthCare, Inc., will administer the new drug, "Lexitol," to 50 patients, once a week for 10 weeks, to determine its effectiveness in treating male baldness. Merck will pay HealthCare, Inc., $100 per patient visit, to be billed at the conclusion of the test period. The total amount of the contract is $50,000 (50 patients x 10 visits x $100 per visit).
Given these kinds of contracts, when should HealthCare recognize revenue-when contracts are signed, when patient visits take place, when drug manufacturers are billed, or when cash is collected?