Chapter 4, Problem 4.1E

Revenue Recognition

The highway department contracted with a private company to collect tolls and maintain facilities on a turnpike. Users of the turnpike can pay cash as they approach the toll booth, or they can purchase a pass. The pass is equipped with an electronic sensor that subtracts the toll fee from the pass balance as the motorist slowly approaches a special toll booth. The passes are issued in $10 increments. Refunds are available to motorists who do not use the pass balance, but they are issued very infrequently. Last year, $3,000,000 was collected at the traditional toll booths, $2,000,000 of passes were issued, and $1,700,000 of passes were used at the special toll booth. How much should the company recognize as revenue for the year? Explain how the revenue recognition rule should be applied in this case.

To determine

Concept Introduction:

Profit is calculated by reducing all the expenses from the total income of the company. All expenses include the cost of goods sold, administration expenses, selling expenses and some other expenses. Revenue is recorded when business earn it not when it recovers from customer.

To Explain: Amount of revenue and rule of revenue recognition.

Explanation of Solution

Company record revenue of $ 4700000 (3000000+1700000) and refund of $ 300000 (2000000-1700000) made to the customer against the passes not used. Revenue is recorded when it earns. So in this case all income received in cash is recorded as income and all passes that used on toll is also recorded as income but those passes which cannot be used is refunded to the customer.