On October 1, 2016, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at $3 per gallon. Fifty thousand gallons were delivered on December 15, 2016, and the remaining 50,000 gallons were delivered on January 15, 2017. Payment terms were 50% due on October 1, 2016, 25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale during 2017?

a) $75,000

b) $150,000

c) $225,000

d) $300,000

Question

Business

Chaz Preston

21 October, 09:39

On October 1, 2016, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at $3 per gallon. Fifty thousand gallons were delivered on December 15, 2016, and the remaining 50,000 gallons were delivered on January 15, 2017. Payment terms were 50% due on October 1, 2016, 25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale during 2017?

a) $75,000

b) $150,000

c) $225,000

d) $300,000

+5

Answers (1)

Know the Answer?

Peter Sullivan · Answer 1

It should recognize for revenue for the 50,000 gallons delivered on January 15th for a value of 150,000 (50,000 gallons at $3 each)

Explanation:

Accrual principle. The transactions should be posted on the moment they actually occur, regardless of the cash flows associated with them. In this case, the sale revenue is happening on Jan 15th, the collection cycle does not impact the revenue recognition for this or any sale.

Conservatism principle. The revenues will be recorded only when the company is 100% sure that they will exist. Because the buyer can redefine the contract and only made the first purchase, so in December when 50,000 gallons are delivered, the company realizes that revenue and in January, when the company delivers another 50,000 it will recognize the other half. Doing that the company is being conservative, which is the right thing to do.

Reliability principle. Only transactions proven can be recorded. The sale proven on the accounting cycle of 2017 is for 50,000 sold at Jan 15th

Revenue recognition principle. This is the concept that you should only recognize revenue when the business has substantially completed the earnings process. As said before, the buyer could order a fewer amount for the second request or nothing at all, on December 15th there are 50,000 gallons delivers and therefore their earnings process substantially completed, so they are recorded for the 2016 cycle. One month later, on Jan 15th there is a second delivery for 50,000 gallons, which a substantially completed earning process as well, so 50,000x $3 = 150,000 of earnings