How should the proceeds received from advance sale of tickets to a sporting event be treated by the seller…ASSUMING TICKETS ARE NON REFUNDABLE… A unearned revenue is recognized to the extent that costs have been incurred. B revenue is recognized to the extent that costs have been incurred. C revenue is deferred until sproting event is held. D revenue is recognized as tickets are sold. now the answer is C… but my question is TICKETS ARE NON REFUNDABLE… so in that case can we assume that event is going to happen for sure??
I will approach this question with the odd-man out strategy: First of all, A & B is incorrect because costs cannot be incurred. Costs can only be incur as the expense for sporting event substantially begin. D is also incorrect because we are working as accrual basis rather than cash basis. which left the answer as C.
you can look at it like this: Just because the tickets are nonrefundable does not mean the event will happen for sure (i.e. natural disaster, strike, etc.). So the comment about it being nonrefundable is there to kind of trick you into thinking it can be recognized; the seller still has to ensure that the event actually happens, or he will have to ensure refunds. Also, accounting rules say that revenue is never recognized until the item/service is exchanged, regardless if the service is nonrefundable.
It’s like if you paid for a plumbing service to be done next year in advance, the fee you paid is nonrefundable but to follow accrual accounting, don’t recognize until the service is done next year, which means as the two above said, the “non-refundable” part is there to throw you off but is irrelevant to the question and the answer. =)
“Also, accounting rules say that revenue is never recognized until the item/service is exchanged, regardless if the service is nonrefundable.” +1
Answer C is fine. I also reached there by POE. unearned revenue has to be recognized at the time tickets are sold. (Liability) + Cash (Asset) is increased by the same amount. Later after the event : unearned revenue (Liability) is reduced and revenue is recognized (Owner’s Equity) is increased. What is wrong with option A is : “to the extent that costs have been incurred” Somebody please confirm whether I’m right.