Trans- share Inc should recognize revenue-using option two, which will recognize revenue as in operating lease or a service contract (Morrissey 1). Once this revenue once recognized, it is recorded in the journal entry as:
Journal Entries
The other three options are not relevant to fractional interest program business. As far as Trans- share Inc s case is concerned, the second option would definitely help them manage the company’s affairs well and report the company’s financial position. It is evident that recognizing revenue using the other methods is fraught with the danger of manipulation and loss making. As already discussed, the problem with these other methods is that they assume that the company can make a loss without affecting the business. Thus, the company should adopt this method as recommended.
The basic difference between the methods proposed lies in the approach they take towards the accounting treatment for revenue. The method selected asserts that revenue must be identifiable, but the duration of the contract must recognize by way of disclosure. The problem lies in determining the correct value of the asset remaining and future economical benefits and the rate of attrition of the asset but revenue recognition has no problem. The firm must charge all costs incurred to normal operating expenses. Without reference to the discussed above, it is imperative to understand the different viewpoints with regard to revenue recognition methods.
Basing from the presented facts above, it could be realized that option two is ideal for the company to be adopted. Take note that in coming up with a viable decision; the company should first consider the primary mission and the type of services they offer. Like an operating risk this method will recognize depreciation in the books which will also offer cash flow reinvestment. However, a discloser will need to be made as a footnote in the books of account to explain the treatment of revenue. A schedule of all lease rentals will be maintained and renewal options recorded. When there is a return of the aircraft, a different treatment will be carried out in recognizing the assets in the books of accounts.
It should be noted that the value of assets would; be reducing as time goes by because of depreciation. Therefore, a delay in the recognition of revenue will mean that expense should also be recognized. This alone affects other options that tend to delay revenue recognition.
In adopting the this method of revenue recognition will give the company a well distributed revenue compared to the other proposed methods.
The method of recording revenues in our books will go a long way in strengthening our hold in the business or we are at a risk of losing leadership position in the business. It is important for the accounting department to take immediate action in formulating strong revenue recognition so that we retain our leadership status. In the meantime, until a permanent method is framed, we should take immediate steps by the method I have proposed.
The company should adopt a method of recognizing revenue at the time the sale is made because the method matches the expenses with the revenue. The proposed method will ensure business continuity without interruption due to failure to make profits. If a company makes losses for some time, the creditors will view it as risky and they will avoid offering credit thus grounding the operations. In practice, cash and revenue are recognized when the company delivers or performs a service and receives a payment for it. There are also some exceptions to this rule especially when a company has a high rate of product returns and revenue.
Once a company loses its reputation due to a loss, it is likely to lose its creditworthiness too. This means that the company cannot get out of that problem in the near future even if it resolves its financial difficulties by changing the revenue recognition policy. It is therefore important to maintain or have a policy that ensures that a business be sustained so as if there is need for crediting due to good financial performance, and then the lenders can provide.
In summary, the method of revenue recognition adopted by the company should be of best interest to the company at all times. A method that does not match revenues will lead to a loss thus the company’s failure that can cause bankruptcy. The first option presents a good method of revenue recognition that has the interest of the company in the end. The company needs to have contingency reserve to cater for expected losses in operations. The other methods of revenue recognitions proposed have one or two weaknesses that affect the operations of the company in the end in the eyes of the company.
Works cited
Morrissey, John. Testimony Concerning Telecommunications Accounting Issues. 2002. Web.