Question 1: Gary Miller recently purchased on layaway a big screen television from Warren and Willey Home Furnishings. Warren and Willey is a public company. Gary paid $100 as a cash deposit on the television. The television cost Warren and Willey $2,500 and has a total retail price of $3,000. Warren and Willey has set the television aside pending the payment by Miller of the balance owed.
Warren and Willey does not require its customers to enter into an installment note or other fixed payment commitment or agreement when the initial deposit is received. Merchandise on layaway generally is not released to the customer until the customer pays the full purchase price. If the customer fails to pay the remaining purchase price, the customer forfeits his or her cash deposit. In the event the merchandise is lost, damaged, or destroyed, Warren and Willey either must refund the cash deposit to the customer or provide replacement merchandise.
When should Warren and Willey recognized the revenue from the sale to Miller?
Prepare the appropriate journal entries on Warren and Willey's books to record the receipt of the cash and the subsequent delivery of the television when the remaining balance is collected.
Question 2: Marvel System Services provides its customers with computer-based services over an extended period. Customers are required to prepay the entire fee for the extended service. Marvel performs initial setup activities to enter a customer into its system. The initial setup allows the customer to receive automated services from Marvel from that point forward in the service agreement.
The management of Marvel plans to recognize the revenue over the life of the service contract, but plans to recognize a disproportionate amount of revenue at the beginning of the contract as a result of the completion of the setup activities and the cost incurred in connection with the completion of the setup activities.
Required:
Do you agree with the proposal by the management of Marvel regarding revenue recognition related to the setup activities? How should revenue be recognized for an agreement such as this?