EXERCISE 18-3 (10-15 minutes)

(a)   Cash (2004 slips) (300 X $900)..............................      270,000

                Dock Rent Revenue.........................................                           270,000

        Cash (2005 slips) [200 X $900 X (1.00 – .05)]......      171,000

                Unearned Revenue (current)..........................                           171,000

        Cash (2006 slips) [60 X $900 X (1.00 – .25)]........        40,500

                Unearned Revenue (non-current).................                             40,500

(b)   The marina operator should recognize that advance rentals generated $211,500 ($171,000 + $40,500) of cash in exchange for the marina’s pro­mise to deliver future services. In effect, this has reduced future cash flow by accelerating payments from boat owners. Also, the price of ren­tal services has effectively been reduced. The current cash bonanza does not reflect current earned income. The future costs of operation must be covered, in part, from this accelerated cash inflow. On a present value basis, the granting of these discounts seems ill-advised unless interest rates were to skyrocket so that the interest earned would offset the discounts provided.

        Sales Revenue—Texts*.................................            80,000

        Allowance for Returns...................................       1,920,000

        Accounts Receivable.....................................                               16,000,000

        *A debit to either Sales Revenue—Texts or Sales Returns could be made here.