Reference no: EM132828156

Question - Zac Murphy is president of Blooming Colours Ltd., which provides landscaping services in Leamington, Ontario. On November 20, 2022, Murphy signed a service contract with Eastern University. Under the contract, Blooming Colours will provide landscaping services for all of Eastern's buildings for a period of two years, beginning on January 1, 2023, and Eastern will pay Blooming Colours on a monthly basis, beginning on January 31, 2023. Although the same amount of landscaping services will be rendered in every month, the contract provides for higher monthly payments in the first year.

Initially, Murphy proposed that the revenue from the contract be recognized in 2022. However, his accountant, Sue Storm, convinced him that this would be inappropriate. Then Murphy proposed that the revenue be recognized in an amount equal to the cash collected under the contract in 2022. Again, Storm argued against his proposal, saying that ASPE requires recognition of an equal amount of contract revenue each month.

Required -

1. Give a reason that might explain Murphy's desire to recognize contract revenue earlier rather than later.

2. Put yourself in Storm's position. How would you convince Murphy that his two proposals are unacceptable and that an equal amount of revenue should be recognized every month?

3. If Storm's proposal is adopted, how would the contract be reflected on the statement of financial position at the end of 2022 and at the end of 2023?