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?
A) On January 1, when the commitment is made.
B) On January 5, when the contract is signed.
C) On January 10, when Slowpay takes possession.
D) On February 15, when the payment is due.
E) On March 10, when payment is received.

Question

Quizplus · Accepted Answer

Under GAAP rules, revenue is recognized when it is earned and realized or when there is an agreement between the buyer and seller. In this case, the verbal commitment made on January 1 is not sufficient to recognize the sale as income. The contract signed on January 5 is the agreement between the buyer and seller, and therefore, the sale should be recognized as income on that date.

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