Accounting Case Question?
What is the accounting issue in this event? What's accounted for incorrectly? Would really appreciate some help!
In May 2018, Jones Inc. opened a large plumbing department. Because management had little expertise in plumbing but wanted to provide for customers’ plumbing needs, it contracted with LIT Plumbing Ltd. (LIT) to own and operate the plumbing department. LIT paid Jones a $200,000 non-refundable fee on July 15, 2018 and will pay 5 percent of net sales (sales after returns and bad debts) per year. LIT is getting the plumbing department ready for business. The contract between LIT and Jones is for 10 years. Jones capitalized the $200,000 fee as a long-term deposit and will recognize it as revenue over the term of the contract on a straight-line basis
- Don GLv 72 months ago
For Jones, this is the most conservative approach.