On January 1, Slowpay Company makes a verbal commitment to buy a $150,000 piece of equipment. (On January 5 the contract is signed.) A $1,000 down payment is paid on January 5 and the machine is delivered on January 11. The balance owed is due on February 15, but Slowpay waits until March 10 to pay. When will the firm that sold the equipment to Slowpay recognize the sale as income under GAAP rules?

Question

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Under GAAP (Generally Accepted Accounting Principles), revenue is recognized when it is earned and realizable, regardless of when payment is received. The sale is considered earned when the seller has performed their part of the agreement, which typically occurs when the goods are delivered or services are provided. In this scenario, the sale would be recognized on January 5, when the contract is signed, as this represents the formal agreement between the two parties, indicating that the seller is obligated to transfer the goods and the buyer is obligated to pay for them. The delivery on January 11 and the payment dates are not relevant for the timing of revenue recognition under these principles.

On January 1, Slowpay Company Makes a Verbal Commitment to Buy