EXERCISE 18-3 (10-15 minutes)

EXERCISE 18-3 (10-15 minutes)


(a)   Cash (2004 slips) (300 X $900)..............................      270,000
                Dock Rent Revenue.........................................                           270,000

        Cash (2005 slips) [200 X $900 X (1.00 – .05)]......      171,000
                Unearned Revenue (current)..........................                           171,000

        Cash (2006 slips) [60 X $900 X (1.00 – .25)]........        40,500
                Unearned Revenue (non-current).................                             40,500

(b)   The marina operator should recognize that advance rentals generated $211,500 ($171,000 + $40,500) of cash in exchange for the marina’s pro­mise to deliver future services. In effect, this has reduced future cash flow by accelerating payments from boat owners. Also, the price of ren­tal services has effectively been reduced. The current cash bonanza does not reflect current earned income. The future costs of operation must be covered, in part, from this accelerated cash inflow. On a present value basis, the granting of these discounts seems ill-advised unless interest rates were to skyrocket so that the interest earned would offset the discounts provided.



ss=BodyLarge style='margin-top:6.0pt;tab-stops:30.0pt 60.0pt right dotted 318.0pt blank 405.0pt 504.0pt'>        Cash..................................................................     14,000,000

        Sales Revenue—Texts*.................................            80,000
        Allowance for Returns...................................       1,920,000
        Accounts Receivable.....................................                               16,000,000

        *A debit to either Sales Revenue—Texts or Sales Returns could be made here.



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