Statement of the problem:
Trans-Share Inc is a marketer and operator of the fractional interest aircraft programs. The company is planning to issue initial public offering which enables the company to adapt new accounting practices and can also reevaluate the past financial reports to make it in line with the newly chosen methodology. The challenge for the company is how to account for the revenue it earned through sales and subsequent of fractional interest.
Current revenue recognition method:
The company recognized the revenue at the time of sale of a fractional interest and the remaining parts of the program are accounted as separate transactions. Initial sale of the fractional interest gives the company a profit because of the sales price provided in the agreement exceeds the cost of that proportion of the aircraft. To keep the profit, the company is required to sale the necessary volume to cover up the fixed costs of the operations. In general, the company will incur a loss when it is going the increase the number of aircrafts in the management of operations.
Available options with their recognition:
Option 1: Matches with the current revenue recognition method used by the company. The revenue is recognized at the time of sales of the fractional interest to the customer. Other attributes of the program such as, ongoing management of the aircraft, customer right to resell the aircraft to company at fair value, and the remarketing of the used aircraft, are to be considered as separate transactions
Recognition: The sales price constitutes the increase in monetary gain by the company but corresponding proportionate cost of the aircraft is needs to be decreased to reach the final value of revenue.
Option 2: The options facilitates to account on the basis of operating lease provided or a service contract received from the customer. The revenue