F1 M3-4 Revenue Recognition

Question 1

What is the 5 step approach to recognizing Revenue?

Answer 1

Revenue recognition occurs when an entity satisfies a performance obligation by transferring a good or a service to a customer.
o 5 Step Approach
I - Identify contract with the customer
S - Separate performance obligation
T - Transaction price
A - allocate the transaction price to separate performance obligations
R -Recognize revenue when or as the entity satisfies each performance obligation.

Question 2

When does the completed contract method recognize revenue?

Answer 2

At the end of the project

Calculation = Contract price -total cost

Question 3

Long-term contracts - Calculation for % of completion?

Answer 3

1 Calculate Gross Profit
Contract price -
(total estimated cost)
= GP

2. Determine annual % of completion
   Total actual cost (cost to date) / Total estimated cost
3. Current year GP * % complete

4 Determine construction in progress
Current year GP
< prior year GP>
=CIP

Question 4

What are the long term contract journal entries?
Record cost incurred
Record billing on contract
Record payment received
Record GP during construction

Answer 4

To record cost incurred
Dr. CIP
Cr. Cash

To record billing on contract
Dr. AR
Cr. Progress billings

To record payment received
Dr. Cash
Cr. AR

To record GP during construction
Dr. Construction expense - total cost to date - PY cost
Dr. CIP
Cr. Construction revenue