F1.4 Revenue Recognition: Part 2

Question 1

Loss effect percentage of completion and completed contract

Answer 1

Decrease operating income in both methods, entire estimated loss recorded for a loss contract in progress (not only the loss incurred to date).

Question 2

Completed contract

Answer 2

Rev. recog. When contract is complete, however expected losses are recognized immediately in their entirety. / q8 Total contract price - less total cost of contract = gross profit recognized when contract is completed

Question 3

Percentage of completion (PoC)

Answer 3

q3, 1. Recog. Loss immediately 2. Contract Price is 420, total costs 240 (cost incurred) + 120 (est. cost to complete) = 360. 420 - 360 = 60 gross profit. Percentage is 240/360 = 2/3. 60 * 2/3 = 40. Gross profit in Y2 on IS is 40. / q4 Income recognized, income previously recognized would be used to calculate income recognized in the following year, but not progress billings to date. / q6 In final year of contract, actual rather than expected amounts are used. FORMULA: annual gross profit = [total cost incurred/total expected cost] * [total expected gross profit] less total gross profit previously recognized

Question 4

PoC, net current asset or net current liability

Answer 4

q15, Formula: cumulative cost incurred + cum. Gross profit recog. - cum. Billings. Excess is reported as current asset. If cum. Billings exceeds sum of cum. Costs incurred plus cum. Gross profit, diff. reported as a current liability. If two amounts are equal, no asset or liability is recog.

Question 5

Incremental cost of obtaining contract, recognized as asset

Answer 5

Commission cost (25k) would not have been incurred if contract had not been obtained and can be recognized as an asset. / Design costs of 40,000 and printing costs of 10,000 should be expensed as cost of sales related to contract.

Question 6

Rev. recog. From bill and hold arrangment

Answer 6

9/1/Y2, buyer (S&B) did not take delivery until Y3, seller (JoJo) recognized rev. from sale on 9/1/Y2 b/c there is substantive reason for build and hold arrangement, roasters built to buyer’s specs, separately identified and cannot be directed to another customer, and roasters are completed and ready to transfer to buyer (S&B) on that date.

Question 7

Consignor/Consignee, inventory and revenue of consignee

Answer 7

Consignor maintains inventory on books. Consignee does not record full rev. amount, but rather a commission on agreement with consignor. Here, unsold rugs reported on books of consignor. Consignee rev. based on agreed upon commission with consignor.

Question 8

Unlimited right to return (rev. recog.)

Answer 8

No rev. recog. / Products w/ right of return, record rev. for transferred products equalling amount of consideration the entity expects to be entitled to receive (revenue will not be recog. For products that entities anticipate having to return). Here, no consideration rec’d (create refund liability) and no resale of products has occurred at 12/31, which would result in rev. / q24, rev. recog. after 12 months, which time buyer agreed to make return for refund. Refund liability is amount entity does not expect to be entitled to receive. Here, bc buyer given 12 months to return for refund, once 12 month passed, seller recog. rev. bc any future returns will result in exchanges rather than refunds