The XYZ Company operates a catering service specializing in business luncheons for large businesses. XYZ requires customers to place their orders two weeks in advance of the scheduled events. XYZ bills its customers on the tenth day of the month following the date of service and requires that payment be made within
30 days of the billing date. Conceptually, XYZ should recognize revenue from its catering services at the date when a ________.
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A. B. C. D. E.D
Revenues should be recognized when they are realized or realizable and earned. The most common time at which these two conditions are met is when the product or service is delivered.
The correct answer is D. luncheon is served.
Revenue recognition is a fundamental accounting concept that determines when and how a company should recognize revenue in its financial statements. In the case of XYZ Company, which operates a catering service, revenue should be recognized at the date when a luncheon is served.
Revenue recognition generally follows the following five-step process:
Identify the contract with the customer: In this case, the contract between XYZ Company and its customers is established when the customer places an order for a business luncheon.
Identify the performance obligations: XYZ Company's performance obligation is to provide catering services for the business luncheon.
Determine the transaction price: The transaction price is the amount XYZ Company expects to be entitled to in exchange for providing the catering services. This could be based on the agreed-upon price per person or the total cost of the event.
Allocate the transaction price to the performance obligations: If there are multiple performance obligations, such as providing food, beverages, and service staff, the transaction price needs to be allocated to each obligation based on their relative standalone selling prices.
Recognize revenue when the performance obligation is satisfied: Revenue should be recognized when XYZ Company satisfies its performance obligation by providing the catering services, which occurs when the luncheon is served. This is because at this point, the company has completed its obligations, and the customer has received the value of the service.
The other answer options are not appropriate for revenue recognition in this scenario:
A. Billing is mailed: Sending a billing invoice does not represent the completion of the performance obligation. Revenue recognition is not tied to the billing process itself.
B. Customer's payment is received: Receiving payment from the customer does not determine when revenue should be recognized. Revenue recognition should be based on when the performance obligation is satisfied, not when payment is received.
C. Customer places an order: While this is the point at which a contract is established, revenue recognition should not be tied to the order placement. Instead, it should be linked to the point of satisfaction of the performance obligation.
E. None of these answers: This option is incorrect because revenue recognition should be tied to the satisfaction of the performance obligation, which occurs when the luncheon is served.
In summary, according to the revenue recognition principle, XYZ Company should recognize revenue from its catering services at the date when the luncheon is served.