Exercise 3.7 Page 118

Exercise 3.7

Page 118

The following Transactions were carried out during the month of May by M. Palmer and Company, a firm of design architects.

For each of the five Transactions, you are to state whether the transactions represented revenue to the firm during the month of May. Give Reasons for your decision in each case.

a. M. Palmer and Company received $25,000 cash by issuing additional shares of capitol stock.

Explanation: This transaction does represent revenue to the firm because money is earned the owners equity is increasing therefore this is revenue.

b. Collected Cash of $2,400 from an account receivable. The receivable originated in April from services rendered to Client. Explanation: revenues are recorded when they are earned not when they are received, so this would have been recorded in April.

c. Borrowed $12,000 from Century Bank to be repaid in three months.

Explanation: This is revenue for the month of May. Since the loan was obtained in May this is considered revenue for May.

d. Earned $83.00 interest on a company bank account during the month of May. No withdrawals were made for this account. Explanation: This is called Interest Revenue or revenue stemming from interest earned on bank deposits, notes receivable, and interest bearing investments.

e. Completed plans for guesthouse, pool, and spa for a client. The $5,700 fee for this project was billed to the client in May, but will not be collected until June 25. Explanation: May will show as services rendered therefore revenue for May. Revenues are recognized when it is earned not when the cash is received.