Exchanges and Revenue Recognition Issues
Response to the following problem:
Certain business "exchanges" are very complex and may qualify as exceptional cases in which the related revenues and expenses are advanced or deferred.
The following are four such cases:
1. Franchisor grants a franchise to a franchisee; it collects part of the initial franchise fee and agrees to perform related initial services over an extended period.
2. Land development company acquires land for future development into a "sports retirement community," subdivides the land into lots, and sells the lots on "credit" with payment to be made on a long-term basis.
3. Lessor leases equipment to a lessee on a long-term noncancelable lease; the fair value of the leased item is greater than the cost, and the ownership of the leased item is transferred to the lessee by the end of the lease life.
4. A construction company builds bridges; it enters into a contract to construct a bridge for Rice County over a two-year period.
Required:
For each of the preceding exchanges, (a) explain the revenue recognition issues involved, and (b) discuss when the revenue is recognized and by what method.