M1-F4 - Revenue Recognition: Part 2 Flashcards
______ are costs of obtaining a contract as costs incurred that would not have been incurred if the contract had not been obtained
Incremental Cost
Incremental Cost are recognized as ______
An Asset
If An entity has cost that would have been incurred regardless of either the contract was obtained, these cost should be
Expensed
A _____ controls the good or service before it is transferred to the customer.
Principal
Principal entity should recognize revenue equal to the ______ consideration expect to receive
Gross amount
The ______ arranges for the other party to provide the good or service tot eh customer
Agency
The Agency entity should recognize revenue equal to the __________ (fee or commission for performing the agent function
Net Amount
A entity is the agent if : (3)
1) not responsible for fulfilling the contract 2) does not have inventory risk, 3) has no discretion in establishing prices for the other party’s goods or services.
A ______ is a contract by which on entity sells an asset and either promise to or has a option to repurchase the asset
Repurchase agreement
What are the three forms of repurchase agreements? (3)
1) Entity obligation to repurchase the asset - A forward 2) Entity’s right to repurchase the asset (call option) 3) the entity’s obligation to repurchase at the customer request (put option)
A _____ is given an entity’s obligation to repurchase an asset in a repurchase agreement
Forward
A _____ gives the entry’ right to repurchase the asset
Call option
A _____ the entity obligation to repurchase the asset at the customer request.
A put option
On a forward or Call repurchase agreement it would be considered ______ when (Purchase price is less than the selling price)
Lease
On a forward or Call repurchase agreement it would be considered ______ when (Purchase price is equal or greater than the selling price)
Financing Agreement
On a forward or Call repurchase agreement, if the contract is a financing agreement the entity will recognize ______
An Asset and financial liability for any consideration received from he customer and interest expense is the difference between the two.
(JE) Financing Agreement - Repurchase Agreement - What is the journal entry when the repurchase price is equal or greater than the original sells price?
Dr Cash CR Financial Liability
(JE) Financing Agreement - Repurchase Agreement - What is the journal entry to record the interest expense when the repurchase price is equal or greater than the original sells price?
Dr Interest Expense. CR Financial Liability
(JE) Financing Agreement - Repurchase Agreement - What is the journal entry to record (if the re–purchase lapse) when the repurchase price is equal or greater than the original sells price?
DR Financial Liability. CR Revenue
If the entity has an obligation to repurchase the asset at the customer’s request for less than the original sales price, the entity will account for the contract as either (2)
1) Lease, 2) Sale with right to return
If the customer has a significant economic incentive to exercise the right since the price to repurchase the asset is less than the original sales price it will be considered
A Lease
If the customer does not have a significant economic incentive to exercise the right the nit would be considered as
A sale with a right to return
Costs to obtain a contract are treated as assets if the entity expects to recover them; costs are treated as ________ if they are borne regardless of whether the contract is obtained
Expenses
In order for contract fulfillment costs to be recognized as an asset, they must __________, ________, and be expected to be _______.
1) directly to a contract, 2)generate/enhance the resources of an entity, 3) recovered
As a principal, an entity has control over the good/service prior to transfer, and revenue recognized will equal expected ______ consideration;
Gross
an agent, an entity does not have control, and revenue equal to a ________ will be recognized.
fee/commission
Contracts in which an entity sells an asset and promises, or has the option, to later repurchase the asset represent ________
repurchase agreements
An obligation to repurchase is a forward; a right to repurchase at an entity’s option is a _____ option;
call option
a right to repurchase at the customer’s option is a ___ option.
put option
___________ allow revenue to be recognized prior to the customer receiving the product.
Bill-and-hold arrangements
In order to recognize revenue for Bill and Hold arrangement, there must be (4) criteria.
1) substantive reason for holding the product
2) the entity cannot use or redirect the product
3) it must be separately identified
4) ready for transfer to the purchasing customer.
A ___________ exists when an entity provides a product to a dealer to be held until it is ultimately sold to a third-party customer
Consignment relationship
When is revenue recognized under a Consignment Relationship?
Revenue is recognized either upon ultimate sale to a customer or after the expiration of a defined period of time.
_______ may be treated as separate performance obligations distinct from the product covered in the contract
Warranties
Separate treatment is likely if the warranty (3)
1) not required by law, 2) coverage period is lengthy, 3) specific tasks required regarding compliance assurance.
When a customer has a right to return a product, an entity should book:
1) Revenue for the amount of consideration it expects to receive; 2) a refund liability; and an 3) asset related to subsequent product recovery.
If the entity cannot reasonably estimate returns, it _____________
cannot record revenue at the time of the sale and has to wait until the sales cannot be refunded.
(JE) what is the journal entry to record a right to return? a product after a sale
DR (Total amount received), CR Refund liability (total minus estimated amount to be refunded) - CR Sales Revenue (Difference)
(JE) What is the journal entry when an asset related to the subsequent recovery of product when he refund liability is settled - product is returned
DR Refund Liability. CR Cash
The ___________ method recognizes revenue over the term of the construction project based on estimated profitability and cost estimates following a four-step process.
The percentage-of-completion method
The __________ method recognizes income on completion of the construction contract.
completed contract method
Why isn’t the completed contract method used for GAAP or IFRS
This method does not match revenues and expenses over the long term.
When using the percentage of completion method and completed contract method, how are losses treated?
Recognized immediately
Under ______, the completed contract method is not permitted.
IFRS
For IFRS, the The __________ method must be used unless the final outcome of the project cannot be reliably estimated, in which case the cost recovery method is required.
percentage-of-completion
Under the _________ method, revenue only can be recognized to the extent of costs incurred.
cost recovery
What is the formula to calculate the GP using Percentage of Completion method?
Contract Price - Estimate Total Cost = Gross Profit
What are the 4 steps to calculate the Percentage of Completion Method (4)
1) Calculate gross profit of completed contract 2) Compute percentage of completion 3) Compute gross profit earned (profit to date) 4) Compute gross profit earned for current year.
When a long term construction contract meets criteria for recognizing revenue over time, it is appropriate to use the percentage of completion method if the entity’s accounting system can:
1) reasonability estimate profitability and
2) provide a reliable measure of progress towards completion
What is the calculation for step 2 of percentage of completion method?
Compute % of completion = Total costs to date/ total set costs
What is the calculation for step 3 of percentage of completion method?
Take step 1 X step 2 = Profit to date
What is the calculation for step 4 of percentage of completion method?
Profit to date @ CY < Profit to date @ Beg = Current Year Profit
(JE) What is the JE to record costs incurred in % of completion?
DR Construction in Progress CR Cash/Material
(JE) What is the JE to record billings in % of completion?
DR A/R. CR Progress Billing
(JE) What is the JE to Record payments received in % of completion
DR Cash. CR Accounts Recivable
(JE) What is the JE to record estimated gross profit during construction?
DR Cost of long-term construction contracts DR. Construction in progress. CR Revenue from LT Construction Contract
When CIP > greater than Progress Billing, the presentation on the balance sheet is
Current Asset (Cost of uncompleted contracts in excess of progress billings)
When CIP < less than Progress Billing, the presentation on the balance sheet is
Current Liability (progress of billings on uncompleted contracts in excess of costs)
% of Completion - CIP includes
1) Costs, 2) and estimated gross profit earned to date
(JE) What is the JE to close construction accounts at end of contract?
DR - Progress Billings CR - Construction in Progress
What is the journal entry to close billings to revenue for Completed Contract
DR - Progress billings CR - Revenue
What is the journal entry to close billings to expense for Completed Contract
DR Cost of LT Construction contract CR - Construction in progress
