MidwestAdvertising Agency handles advertising for clients under contracts thatrequire the agency to develop advertising copy and layouts, as well asplace advertisements in various media. The agency typically chargesclients a commission of 15% of the media cost. The agency makes advancebillings to its clients of the estimated media cost plus its 15%commission. Adjustments to these advances usually are small.Frequently, both the billingsand receipt of cash from these billings occur before the period in whichthe advertising actually appears in the media. A conference meeting isheld between officers of the agency and the new firm of Certified PublicAccountants (CPAs) recently engaged to perform annual audits. In thismeeting, consideration is given to four possible points for measuringrevenue:At the time the advanced billing is madeWhen payment is received from the clientIn the month when the advertising appears in the mediaWhen the bill for advertising is received from the media, generally in the month following its appearanceThe agency has been following the first method for the pastseveral years, on the basis that a definite contract exists and therevenue is earned when billed. When the billing is made, an entry isprepared to record the estimated receivable and liability to the media.Estimated expenses related to the contract are also recorded. Adjustingentries are made later for any differences between the estimated andactual amounts.As a member of the CPA firm attending this meeting, how would youreact to the agency’s method of recognizing revenue? Discuss thestrengths and weaknesses of each of the four methods of revenuerecognition and indicate which one you would recommend the agencyfollow. Explain the reasons for your choice.
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