Recognizing Revenue
Response to the following problem:
James Dee Company cleans the outside walls of buildings. The average job generates revenue of $800,000 and takes about two weeks to complete. Customers are required to pay for a job within 30 days after its completion. James Dee Company guarantees its work for five years-if the building walls get dirty within five years, James Dee will clean them again at no charge.
James Dee is considering recognizing revenue using one of the following methods:
a. Recognize revenue when James Dee signs the contract to do the job.
b. Recognize revenue when James Dee begins the work.
c. Recognize revenue immediately after the completion of the job.
d. Recognize revenue 30 days after the completion of the job when the cash is collected.
e. Wait until the five-year guarantee period is over before recognizing any revenue.
Which revenue recognition option would you recommend to James Dee? Explain your answer.