Ch 5 Flashcards
What are the five steps of the revenue recognition process?
- Identify the contract with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when or as the company satisfies a performance obligation.
In 2013, Airbus announced a contract to deliver 50 A380 airplanes to Emirates for $20 billion to be delivered between 2016 and 2018.
Required: Outline the five-step revenue recognition process for this transaction.
- Airbus and Emirates agreeing into the contract for the A380 airplanes for 20 billion dollars.
- The performance obligation is for Airbus to deliver 50 A380 airplanes from 2016 to 2018. Only one performance obligation.
- The price was determined to be 20 billion.
- Allocating the 20 billion dollars to a per plane delivered price.
- Revenue would be recognized when all of the planes are delivered to Emirates and they control the planes.
Skippers Landing sells boats and provides mooring facilities for its customers. Skippers Landing sells the boats for $60,000 each and provides mooring facilities for $10,000 per year. It concludes that the goods and services are distinct and account for them as separate performance obligations. Skippers Landing enters into a contract to sell a boat and one-year of mooring services to a customer for $65,000.
How should Skippers Landing allocate the transaction price of $65,000 to the performance obligations?
Transaction price must be allocated to each obligation based on the relative stand alone value.
$60,00086%=$55,714.29
$10,00014%=$9,285.71
Other methods include using the residual value or fair market value.
You are requested to deliver your auditor’s report personally to the board of directors of Sebal Manufacturing Corporation and answer questions posed about the financial statements. While reading the statements, one director asks, “What are the precise meanings of the terms cost, expense, and loss? These terms seem to identify similar items and other times seem to identify dissimilar items.”
Explain the meaning of cost.
The original amount incurred to receive or produce an asset, this would include all of the necessary expenses to bring the asset to its primary intended use.
Cost is primarily used in determining the value of assets.
You are requested to deliver your auditor’s report personally to the board of directors of Sebal Manufacturing Corporation and answer questions posed about the financial statements. While reading the statements, one director asks, “What are the precise meanings of the terms cost, expense, and loss? These terms seem to identify similar items and other times seem to identify dissimilar items.”
Explain the meaning of expense.
The costs that are incurred in normal operating activities to generate revenue.
You are requested to deliver your auditor’s report personally to the board of directors of Sebal Manufacturing Corporation and answer questions posed about the financial statements. While reading the statements, one director asks, “What are the precise meanings of the terms cost, expense, and loss? These terms seem to identify similar items and other times seem to identify dissimilar items.”
Explain the meaning of loss.
A decrease in the value of an asset over a period of time.
Classify each of the following items as a cost, expense, loss, or other category, and explain how the classification of each item may change.
Cost of Goods Sold
Primarily a cost.
May be a loss if the original inventory is damaged or lost
Classify each of the following items as a cost, expense, loss, or other category, and explain how the classification of each item may change.
Bad Debts Expense
Primarily an expense.
Can be a contra-revenue account to offset gross sales.
Classify each of the following items as a cost, expense, loss, or other category, and explain how the classification of each item may change.
Depreciation Expense for Plant Machinery
Category is primarily a cost.
Classify each of the following items as a cost, expense, loss, or other category, and explain how the classification of each item may change.
Organization Costs
Primarily an expense.
May be capitalized and amortized over time.
One time cost during the formation of a business.
Classify each of the following items as a cost, expense, loss, or other category, and explain how the classification of each item may change.
Spoiled Goods
Loss.
What is a period cost?
Cost expirations closely related to a period of time rather than a product
Ex. administrative salaries or advertising costs
What is a product cost?
Cost expirations directly associated with the company’s product
Ex. direct material, direct labor, and direct factory overhead
Economists and accountants agree that the concept of income is vitally important. However, the two disciplines disagree on what income is and how it should be measured.
Team 1: Present arguments in favor of the economist’s view of the concept of income.
Income measures only the recorded net asset values, exclusive of capital and dividend transactions.
Recognize income before it is realized to get a better valuation of the company.
Economists will predict future cash flows to get a better picture of the company for investors.
Future outlook is a better measure.
Economists and accountants agree that the concept of income is vitally important. However, the two disciplines disagree on what income is and how it should be measured.
Team 2: Present arguments in favor of the accountant’s view of the concept of income.
Use the matching principle.
There should be a transaction approach to record income of a company.
This is more accurate because it is not contingent on any future events, it represents current activity.
