3. Module 9: Revenue Recognition Flashcards
What is revenue recognition?
Recognition- principles establish criteria concerning when and element should be included in the statements.
Define the Matching Principle?
Matching principle – expenses must be recognized in the same period as revenues they relate to.
When is the sale of Agricultural Products recognized?
Exception to recognition principle- For Agricultural Products that are Homogeneous and have an immediate marketability at quoted price such as cotton, recognize ALL revenue at the “quoted price”
When is revenue from stems from allowing others to use entity’s assets recognized?
Revenue that stems from allowing others to use then entity’s assets (interest revenue, royalty revenue, rental revenue) is recognized when the assets are used.
D: Cash xx
C: Unearned revenue xx
D: Unearned Revenue xx
C: Earned Revenue xx
When is Franchise Fee recognized?
Franchise Fee- is recognized when all material services have been substantially performed by the franchisor.
Substantial performance – means that all the following have been met:
• Franchisor has no obligation to refund any payment received from franchisee
AND
• Initial services required of the franchisor have been performed
When is initial Franchise Fee is recognized?
Initial Franchise Fee – is recognized as revenue only upon substantial performance of the initial service obligation.
Direct Franchise costs- are deferred until the related revenue is recognized.
What the entries to record franchise fee?
Franchisor (Headquarter) – the PV of future services are recorded as “unearned revenue”. This is recognized once substantial performance has occurred.
Franchisee - The PV of amount paid or to be paid is recorded as an “intangible asset” on the balance sheet and amortized over the expected period of benefits for the franchise.
What conditions must be met for an item to be considered a separate unit of accounting under the Multiple-Deliverable Revenue Arrangement?
Two(2) conditions must be met for an item to be considered a separate unit:
(1) The item has value as on a stand-alone basis
(2) If the arrangement includes a right of return, the undelivered item must be substantially in control of the vendor.
The revenue is divided into separate units based on the relative selling prices.
What is the Milestone Method?
The Milestone method of accounting may be used for “research & development arrangements in which revenue to the vendor is contingent on achieving one or more milestone related to deliverables.
Under the milestone method, a “contingent revenue” may be recognized in its entirely.
How are computer software development costs treated?
- Expense costs incurred until technological feasibility has been established for the product
- Capitalized costs incurred after technological feasibility has been established
Technological feasibility is established upon the completion of either
- A detailed program design
- Completion of a working model
How are Computer software developed internally or obtained for internal use only costs treated?
Computer software developed internally or obtained for internal use:
• Expense costs incurred for the preliminary project state and costs incurred for training and maintenance
• Capitalize costs incurred after the preliminary project state and for upgrades and enhancements including:
- Direct costs of materials, services, employees
- Interest costs incurred for project
Capitalized costs should be amortized on a straight line basis
What are Expired Costs and Unexpired costs?
Expired costs (expenses) – costs that expire during the period and have no future benefit Unexpired costs (expenses) – should be capitalized and matched against revenue (PPE, depreciation)
When is the Installment Sales Method used?
The Installment Sales Method is only used when collection of the selling price is not reasonably assured.
Revenue is recognized as cash is collected by applying the gross profit rate.
How Realized Gross Profit is calculated under the Installment Sales Method?
Gross Profit = Sales – COGS
Gross Profit % = Gross Profit / Sales
Realized Gross Profit = Cash Collections x Gross Profit %
Deferred Gross Profit = Installment Receivable balance x Gross Profit%
Other useful formulas:
Installment Sales = (Deferred Gross Profit / Gross Profit%)
Cash Collections = Installment Sales – EB Installment receivable
Realized Gross Profit = Collections x Gross Profit %
How Realized Gross Profit is calculated under the Installment Sales Method?
Gross Profit = Sales – COGS
Gross Profit % = Gross Profit / Sales
Realized Gross Profit = Cash Collections x Gross Profit %
Deferred Gross Profit = Installment Receivable balance x Gross Profit%
Other useful formulas:
Installment Sales = (Deferred Gross Profit / Gross Profit%)
Cash Collections = Installment Sales – EB Installment receivable
Realized Gross Profit = Collections x Gross Profit %
