Joan Holtz (A)
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From Case 5-3, I chose number 3, Cruise. Raymond’s, a travel agency, chartered a cruise ship for two weeks beginning January 23, 2007, for $200,000. In return, the ship’s owner agreed to pay all costs of the cruise. In 2006, Raymond’s sold all available space on the ship for $260,000. It incurred $40,000 in selling and other costs in doing so. All the $260,000 was received in cash from passengers in 2006. Raymond’s paid $50,000 as an advance payment to the ship owner in 2006. How much, if any, of the $260,000 was revenue to Raymond’s in 2006? Why? Does the question of whether passengers were entitled to a refund in 2007 if they canceled their reservations make any difference in the answer? Why?
According to the U.S. Securities and Exchange Commission, over half of the financial fraud cases involve improper recognition of revenue (Anthony, Hawkins, & Merchant, 2007, p.111). Therefore, an entity should err on the side of caution when reporting revenue. In keeping with the conservatism and realization concept, revenue should be recognized when the service has been performed. Raymond’s collected the $260,000 for promise of a two week cruise beginning January 23, 2007. Therefore, Raymond’s cannot recognize the revenue until the cruise has taken place. I do not believe the fact that passengers are entitled to a refund affects the answer. Cancellations would ultimately affect the revenue amount recorded in 2007, but does not affect the fact that no revenue should be claimed in 2006.
Further confirmation of this argument is SEC Staff Accounting Bulletin No. 101 which considers revenue to be earned when “delivery of the ordered goods has occurred or services have been rendered” (Anthony, Hawkins, & Merchant, 2007, p. 112).