Bonanza Trading Stamps, Inc. was formed early this year to sell trading stamps throughout the Southwest to retailers who distribute them free to their customers. Books for accumulating the stamps and catalogs illustrating the merchandise for which the stamps may be exchanged are given free to retailers for distribution to stamp recipients. Centres with inventories of merchandise premiums have been established for redemption of the stamps.

Retailers may not return unused stamps to Bonanza.

The following schedule expresses Bonanza’s expectations of the percentages of a normal month’s activity that will be attained. For this purpose, a normal month’s activity is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. The company expects that this level will be attained in the third year, and that sales of stamps will average $2,000,000 per month throughout the third year.

a. Explain the factors to be considered in determining when revenue should be recognized in measuring the income of a business enterprise.

b. Explain the accounting alternatives that Bonanza Trading Stamps, Inc. should consider for the recognition of its revenues and related expenses.

c. For each accounting alternative discussed in (2), give balance sheet accounts that Bonanza should use and indicate how it should classify each.