English Design Gardens Pty Ltd receives $12,000 to design and construct a new garden on 1 January for their client (customer). The design and construction of the garden consists of 6 stages and the work is distributed evenly across these stages. By the end of March, the first three stages have been completed. What revenue if any should be disclosed under the accrual method and the cash method at 31 March?
Group of answer choices
Accrual method $6,000; Cash method $6,000
Accrual method $0; Cash method $6,000
Accrual method $12,000; Cash method $6,000
Accrual method $6,000; Cash method $12,000
Under the accrual method, revenue is recognized when it is earned, regardless of when cash is received. Since English Design Gardens Pty Ltd has completed three out of six stages by the end of March, they have earned 50% (3/6) of the total contract value. Therefore, using the accrual method, revenue of $6,000 (50% of $12,000) should be disclosed at 31 March.
Under the cash method, revenue is recognized when cash is received. The company received $12,000 at the beginning of January, but since no additional cash has been received by the end of March, the cash method would recognize the full $12,000 as revenue when it was initially received, not at the completion of the stages.
So, the correct answer is:
Accrual method
