Determining when to recognize revenue, Noggle Engineering Services provides support for…

Determining when to recognize revenue, Noggle Engineering Services provides support for telecommunications networks. The company is relatively new and recently began offering long-term service contracts. A client can sign a three-, four-, or five-year contract for maintenance and support for its network. For example, a new client signed a four-year contract for maintenance and support. The contract requires the client to pay $5,000 on the first day of each year for the term of the contract. Noggle provides 24/7 rapid-response service whenever needed by the client. Based on experience and its knowledge of the industry, Noggle’s management expects that as a network gets older more service will be required and the cost of providing service will increase. Management estimates that for the four-year contract 15 percent of the costs will be incurred in the first year, 20 percent in the second year, 30 percent in the third year, and 35 percent in the fourth year. Required: a. Identify alternative ways of recognizing revenue and indicate how much revenue would be recognized each year under each of the alternatives. b. Explain which objectives of financial reporting would be served by each alternative. c. Indicate which alternative could be supported by the revenue recognition criteria. d. Which method would you recommend Noggle use for the four-year contract.

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