Chapter 6 Flashcards
Account for a Volume Discount for a Seller
a percentage discount in the price given to a customer by the seller upon meeting a volume threshold
[IFRS]
Accounts Receivable [Debit]
Sales Revenue [Full Credit]
Sales Revenue [Debit]
Contract Liability[Credit]
UPON MEETING THE THRESHOLD:
Contract Liability [Debit]
Accounts Receivable [Credit]
[ASPE]
Accounts Receivable [Debit]
Sales Revenue [Credit]
Sales Returns [Debit]
Allowance for Sales Returns [Credit]
UPON MEETING THE THRESHOLD:
Allowance for Sales Returns [Debit]
Accounts Receivable [Credit]
Percentage-of-Completion
[IFRS]
(1) determine the percentage completed, [costs incurred to date / most recent cost estimate]
(2) apply percentage completed to total revenue, [percent completed * total project revenue = revenue to be recognized to date]
(3) determine current period revenue, [revenue to date - revenue from prior periods = current period revenue]
(4) determine current period profits, [current period revenue - current period costs = current period gross profit]
Contract Asset/Liability [debited]
Materials, Cash, Payables [credited]
Construction Costs Expensed [debit]
Contrac/Asset Liability [credit]
Contract Asset/Liability [debit]
Revenue Recognized [credit]
Accounts Receivable [billings amount debited]
Contract/Asset Liability [billings amount credited]
Cash [cash paid by customer debited]
Accounts Receivable [cash paid by customer credited]
Completed Contract Method
[ASPE] where no estimate is possible, the completed-contract method is used for a long-term project, whereby revenues are recognized only at the end of the project; the company recognizes annually:
(1) construction costs
(2) progress billings
(3) and collections
but DOES NOT record
(1) revenue
(2) and expenses
UNTIL the final year when the contract is completed
Account for a Right of Return from the Seller’s Perspective
where right of return is granted to the customer the company should recognize the following
(1) Revenue (if [IFRS], sales minus expected returns)
(2) [IFRS] Refund liability [ASPE] Sales Returns and Allowance for Sales Returns
(3) Asset (estimated inventory returns)
[IFRS]
SALES:
Accounts Receivable [Debit]
Sales Revenue [Credit]
Refund Liability [Credit]
COGS:
Cost of Goods Sold [Debit]
Estimated Inventory Returns [Debit]
Inventory [Credit]
UPON A RETURN:
Refund Liability [Debit]
Accounts Receivable/Payable [Credit]
Returned Inventory [Debit]
Estimated Inventory Returns [Credit]
[ASPE]
SALES:
Accounts Receivable [Debit]
Sales Revenue [Full Credit]
Sales Returns [Debit]
Allowance for Sales Returns [Credit]
COGS:
Cost of Goods Sold [Debit]
Estimated Inventory Returns [Debit]
Inventory [Credit]
UPON A RETURN:
Allowance for Sales Returns [Debit]
Accounts Receivable/Payable [Credit]
Returned Inventory [Debit]
Estimated Inventory Returns [Credit]
Repurchase Agreements
allows a company to transfer an asset to a customer but results in an obligation or a right to repurchase that asset at a later date; such transactions are reported as financing activities
[IFRS/ASPE (no guidance)]
Cash [Debit]
Contract Liability [Credit]
AT YEAR END:
Interest Expense [Debit]
Contract Liability [Credit]
UPON REPURCHASE:
Interest Expense [Debit]
Contract Liability [Credit]
Contract Liability [Full Debit]
Cash [Full Credit]
Account for Principal-Agent Relationships
the principal provides the goods/services and the agent arranges for the transfer and provision of the goods/services; the agent only claims commissions as revenues
*Account for Consignment (Consignor)
SHIPMENT OF MERCH:
Inventory on Consignment [Debit]
Finished Goods Inventory [Credit]
PAYMENT OF FREIGHT BY CONSIGNOR:
Inventory on Consignment [Debit]
Cash [Credit]
PAYMENT OF ADVERTISING BY CONSIGNEE:
No Entry
SALE OF MERCH:
No Entry Until Notified
NOTIFICATION OF SALES AND REMITTANCE OF DUES:
Cash [Debit]
Advertising Expense [Debit]
Commissions Expense [Debit]
Revenue from Consignment Sales [Full Sales Amount Credit]
Account for *Consignment (Consignee)
SHIPMENT OF MERCH:
No Entry
PAYMENT OF FREIGHT BY CONSIGNOR:
No Entry
PAYMENT OF ADVERTISING BY CONSIGNEE:
Accounts Receivable [Debit]
Cash [Credit]
SALE OF MERCH:
Cash [Full Sales Amount Debit]
Accounts Payable [Full Sales Amount Credit]
NOTIFICATION OF SALES AND REMITTANCE OF DUES:
Accounts Payable [Full Sales Amount Debit]
Accounts Receivable [Credit]
Revenue From Consignment Sales [Credit]
Cash [Credit]
Account for an Estimated Loss on Long-Term Contract
losses that are expected on a long-term contract are recognized in the current period, and accounted for as follows:
(1) current period losses are calculated as [total estimated contract loss - previously recognized profits]
(2) construction costs in the period that the contract loss is recognized are calculated as [previously recognized profits + absolute value of expected loss on the contract + current period revenues recognized = construction costs expensed in current period]
(3) the contract asset/liability account is composed of
a. construction costs to date (not the expensed amount)
LESS
b. billings to date and expected loss on project (the loss on project is the difference between expenses and revenues)
Allocate the Transaction Price to the Separate Performance Obligations
the price is allocated based on the relative values of the STAND-ALONE SELLING PRICES of the goods being bundled; if a bundle is discounted due to a specific service or product, then the company should allocate the discount to that service or product (and not the bundle)
Earnings Approach
[ASPE] uses the earnings approach for revenue recognition, whereby revenues and costs associated with goods are recognized when
(1) risks and rewards have transferred and revenues are earned
(2) the vendor no longer has involvement or control with respect to the goods sold
(3) costs and revenues can be measured reliably; and
(4) collectibility is probable
Asset-Liability Approach
[IFRS] uses the asset-liability approach, where companies account for revenue based on the asset or liability arising from contracts with customers, and whether performance of the contract has begun; the approach follows this 5-step process:
(1) identify the contract with the customers
(2) identify the separate performance obligations in the contract
(3) determine the transaction price
(4) allocate the transaction price to the separate performance obligations
(5) recognize revenue when each performance obligation is satisfied
contracts are not recongized under IFRS where the contract is wholly unperformed, or where each party can unilaterally terminate the contract without compensation
Account for Warranties
[IFRS] companies provide two types of warranties:
(1) assurancy-type warranties provide a gaurantee that the product is free of defects; the company records a warranty liability (based on probable returns) and a warranty expense
NOTE that assurance-type warranty liabilities are not deducted from sales revenue, but are expensed [warranty expense debit]
(2) service warranties provide additional service beyond assurance-type warranties; companies should allocate a portion of the transaction price to this obligation as unearned revenue, which is recognized as it is earned, at the end of each period the warranty is in effect; costs associated with service warranties are expensed as incurred
NOTE that ASPE gives no warranty guidance, but accounting should be similar
Bill-and-Hold
[IFRS/ASPE]
where an entity bills a customer for a product, but retains physical possession and transfers the product at a later date; revenue recognition may occur if
(1) substantive reason to hold the inventory
(2) product is separate and belongs to customer
(3) is ready to ship, and
(4) product cannot be used or sold to another customer
Account for a Principal-Agent Relationship
the agent is a matchmarker that collects on behalf of the wholesaler, but only recongizes revenues on commissions; the principal recognizes revenues when the goods or services are sold to a third party
Constructive Obligation
an obligation that arises even where it is not explicitly stated in a contract, as a result of past practice or signalling to customers; any enforceable promise that results from a sale must be recognized on the statement of financial position
Identify the Separate Performance Obligations in the Contract
a good or service is distinct if a customer can separately benefit from it; performance obligations may not be interdependent with the product with which they were sold; membership renewals at lower prices may be treated as one performance obligation, as may long-term contracts that provide a series of goods and/or services that are substantially the same
Determine the Transaction Price
where the price of a good or service is dependent on future events (volume discount, rebate) the company estimates the amount of variable consideration it expects to receive from the contract, and recognizes either the expected value or most likely amount of consideration as revenue
Conditions for Recognizing Revenue Over a Period of Time
one of the following conditions must be satisfied to recognize revenue over a period of time:
(1) customer receives and consumes benefits as seller performs
(2) customer controls the asset as it is created or enhanced
(3) company does not have alternative use for the asset and the amount is collectible
if satisfied, revenue is recognized by measuring the progress towards completion
Cost-to-Cost
is a measurement of percentage of a project completed calculated by dividing the costs to date by the most recent cost estimate
Zero-Profit Method
where an estimate of costs to completion cannot be made, then the company records recoverable revenues equal to costs until the uncertainty is resolved
Account for Gift Cards
Expected Use Multiplier (EUM)= 1/(% expected to be redeemed)
Sale of Gift Card
Cash [full debit]
Contract Liability [full credit]
Use of Gift Card for Purchase:
Contract Liability [Amount Used * EUM]
Sales Revenue [Amount Used * EUM]
NOTE that the remaining contract liability is held as a current liability on the balance sheet
