Question

Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of

water, Winser does not recognize any revenue from water sales until the sales exceed the costs of exploration, the basis of revenue recognition being employed is the
a. production basis.
b. cash (or collection) basis.
c. sales (or accrual) basis.
d. cost recovery basis.

Answer 1

Winser, Inc. uses the cost recovery basis for revenue recognition, where revenue from water sales is recognized only after the exploration costs are recouped.

Step-by-step explanation:

When Winser, Inc. does not recognize any revenue from water sales until the sales exceed the costs of exploration, the company is employing the cost recovery basis of revenue recognition. Under this method, companies defer the recognition of revenue and profits until the costs of earning them have been recovered. This is conservative accounting practice because it delays the recognition of income until it is certain that the income will not be immediately offset by the costs.