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This exact same question turns up in a google search:
http://www.analystforum.com/forums/cfa-forums/cfa-level-i-forum/91299753
Thanks. So, are we saying that (a) is incorrect because recognition does not depend on costs? i.e. if there had been no mention of costs, could we say that (a) is correct?
In the absence of cost, A would be the same as C, wouldn’t it? There is no incremental way to recognize ticket revenue for an event. The event either happens, and you earned the revenue, or it doesn’t, and you haven’t earned the revenue.
The truly confusing part about that question to me is “non-refundable.” If non refundable means “can not be refunded,” I would argue that the revenue can be recognized as soon as it is received. If it’s truly non-refundable, and the game never happens, does the company just have a perpetual liability for this unearned revenue?
Non-refundable does not make the revenue recognizable immediately. The service or goods should have been delivered or provided in order to record the revenue. Even if it is non-refundable, you can get to a different event at a later time.
I agree, I was just constructing a situation in my head where the company can’t refund the money and can’t recognize the revenue. Non-refundable probably shouldn’t have been in that question.
Perhaps the key issue here is what would happen if the game were cancelled or postponed. If you would have to refund the ticket price in that case (the “nonrefundable” nature of the tickets notwithstanding), then I can see that it’s unearned until the game starts.