Chapter 18 Flashcards
What are revenues?
Are inflows of assets and/or settlements of liabilities from delivering or producing goods, rendering services, or other earnings activities that constitute a company’s ongoing major or central operations during a period
When is revenue recognized?
When it is realized or realizable and earned
What is recognition?
The process of formally recording or incorporating an item in the accounts of an entity
When is revenue considered realized?
When goods and services are exchanged for cash or claims to cash (receivables)
When is revenue considered realizable?
When assets received in exchange are readily convertible to known amounts of cash or claims to cash
When is revenue considered earned?
When a company has substantially accomplished what it must do to be entitled to the benefits represented by the revenue, that is, when the earning process is complete or virtually complete
What is a violation of the revenue recognition principle?
Accounting for construction contracts
What is done with construction contract revenue?
Recognized prematurely
What is done with installment sale revenue?
Defer revenue because unsure if it is collectible
What approach is used to account for construction contracts under the percentage of completion method?
Cost dollar approach
What kind of account is the construction in process account?
Asset account
What journal entry is made to record costs of construction under the percentage of completion method?
Debit construction in process, and credit materials, cash, payables, etc. for costs incurred to date
What kind of account is billings on construction?
Contra-asset account to construction in process
How are construction in process and billings on construction presented on balance sheet?
Billings on construction and construction in process netted on balance sheet
How are progress billings recorded under the percentage of completion method?
Debit accounts receivable and credit billings on construction for amount of progress billings
What journal entry is made to record collections under the percentage of completion method?
Debit cash and credit accounts receivable for amount of cash collected
What journal entry is made to recognize revenue and gross profit?
Debit or credit construction in process for gross profit to be recognized and debit construction expense for costs recorded in period and credit or debit revenue from long term contracts for revenue recognized
What journal entry is made to record final approval of a contract under the percentage of completion method?
Debit billings on construction and credit construction in process for amount of contract
What happens in the event of a negative construction or loss?
Debit revenue account and credit construction in process
When is the final approval of contract recorded?
Recorded in the last year only
Percentage of completion formula
Costs to date/total projected cost
Revenue to be recognized formula
Contract price x percent completed - revenue recognized in prior period
Gross profit to be recognized formula
(Cash collected x percent completed) - gross profit recognized in prior period
What is the difference between the completed contract method and percentage of completion method?
Timing if recognition of revenue, no revenue recognized until very end
What journal entry is used to record final approval of contract under completed contract method?
Debit billings on construction and credit revenues from long- term contracts for amount of contract
What journal entry is used to record expenses of contract under percentage of completion method?
Debit construction expense and credit construction in process for total costs incurred
What are the similarities between the percentage of completion method and the completed contract method?
Similar accounts used, same revenues used, same expenses used, same profit
What are installment sales?
Moderately conservative method of collecting on bad debts
What journal entry is made when installment sales are made?
Debit installment accounts receivable and credit installment sales for amount of sale
What journal entry is made when cash is collected for installment sales?
Debt cash and credit installment accounts receivable for amount of cash collected
What journal entry is made to record cost of goods sold for installment sales?
Debit cost of installment sales and credit inventory
What journal entry is made To close installment accounts?
Debit installment sales for amount of sale and credit cost of installment sales for cost and deferred gross profit for difference between sale amount and cost
WHat journal entry is made to record realized gross profit?
Debit deferred gross profit for gross profit collected and credit realized gross profit
What journal entry is made to close the accounts at the end of the period?
Debit realized gross profit and credit income summary for amount of deferred profit collected
Amount of deferred gross profit calculation
Accounts receivable collected x gross profit percentage
Gross profit percentage calculation
Gross profit/installment sales
When are installment sales mostly seen?
During a hurting economy
What are the three types of installment sales?
Regular sale with collection, default sale, and default sake with damage to property
What kind of account is deferred gross profit?
Liability until customer pays
How does increased revenue effect the financials?
Increases net income, earnings per share, share price, and therefore increases share based compensation
What is required for a contract to be considered special?
Multiple accounting years with a 2 year minimum and must involve very material dollar amounts
What two requirements must e met to use percentage of completion method?
Reliable estimates which relates to earning and reasonable certainty of collection which relates to realizability
What is the secondary method of accounting for contracts?
Completed contract method
When is revenue recognized under the completed contract method?
When the project is complete
Explain the IFRS standard for contracts.
Require all companies to use the percentage of completion an completed contracts method is not allowed
When are installment sales used?
When there is doubt about the ability to pay
What is the cost recovery method?
Worst case scenario, most companies do not use this, no profit recognized
What kind of account is deferred gross profit?
Liability account until customer pays
What happens if there are damages or restoration costs associated with the repossession of inventory?
record the inventory at net fair value by subtracting all costs of damages and restoration
What are installment sales driven by?
by customers ability or inability to pay
What are the three ways to handle installment sales?
1) recognize all profits and pretend the doubt does not exist (never do this), 2) cost-recovery method: no recognition and ultra-conservative, 3) installment sales approach: based on gross profit %, moderately conservative and have deferred gross profit
