The Importance of Recognizing Revenue and Expenses in the Correct Period

Denver Technologies Corp. (DTC) is a provider of Information Technology services for small and medium companies in the Denver, CO, area. The company has a fiscal year end on June 30. On June 28 of this year, DTC was able to sign some three-year contracts to provide services for area companies. The contracts totaled $300,000 with a third of the contracts due immediately (on June 28). According to the agreements, the companies must remit a third ($100,000) on June 28 of each of the following two years. Since the company uses accrual accounting, the sales manager was elated to get the new contracts and indicated that DTC would be able to hit the income target for the year since the contracts were signed before the year-end. Discuss the effects of the contracts on DTC’s financial statements. Describe the proper way to record the transactions on DTC’s book (need 2-3 paragraphs).