For $50 a month, Rawl Co. visits its customers' premises and performs insect control services. If customers experience problems between regularly scheduled visits, Rawl makes service calls at no additional charge. Instead of paying monthly, customers may pay an annual fee of $540 in advance. For a customer who pays the annual fee in advance, Rawl should recognize the related revenue under U.S. GAAP:
a. At the end of the contract year after all of the services have been performed.
b. At the end of the fiscal year.
c. When the cash is collected.
d. Evenly over the contract year as the services are performed.
Explanation
Choice "d" is correct. For a customer who pays the $540 annual fee in advance, the related revenue should be recognized evenly over the contract year as the services are performed (GAAP-accrual basis of accounting).
Choice "c" is incorrect. Under the cash basis of accounting, revenue is recognized when the cash is collected.
Choice "b" is incorrect. Revenue should not be recognized at the end of the fiscal year; it should be recognized evenly over the contract year.
Choice "a" is incorrect. Revenue should not be recognized at the end of the contract year after all of the services have been performed; it should be recognized evenly over the contract year.
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