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17 May, 10:41

Varga Tech Services signed a $126,000 consulting contract with Shaffer Holdings. The contract requires Varga to provide computer technology support services whenever requested over the period from May 1, 2021, to April 30, 2022, with Shaffer paying the entire $126,000 on May 1, 2021.

How much revenue should Varga recognize in 2021? (Do not round intermediate calculations)

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  1. 17 May, 14:36
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    The amount of revenue in 2021 is $84000

    Explanation:

    The contract signed is for a period of 12 months with 8 months in the year 2021 and 4 months in the year 2022.

    As a result 8 months worth of revenue should be recognized in the year 2021, hence revenue recognizable in 2021 is calculated thus:

    8/12*$126000=$84000

    The required entries in the books at the end of 2021 would look like the below:

    Dr Cash $126000

    Cr Revenue $84000

    Cr Deferred revenue $42000

    In the year 2022 the required entries to recognize the balance of $42000 in revenue is shown thus:

    Dr deferred revenue $42000

    Cr revenue $42000

    The whole $126000 cannot be shown in 2021 as revenue as accrual basis of accounting has been adopted even though the whole amount was received in 2021
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