Revenue Recognition

Question 1

What are costs to capitalized to fulfill a contract?

Answer 1

Raw materials
Direct Labor
Overhead

Question 2

What are the criteria for recognizing the revenue for the percentage of completion method (over time)

Answer 2

1. Reasonable estimate profitability

2. Provide a reliable measure of progress toward completion

Question 3

Accounting for Percentage of Completion

How to recognize gross profit

Answer 3

Step 1. Compute gross profit of completed contract:

Contract price - Estimated total Cost = Gross profit

Step 2. Compute percentage of completion

         Total cost to date/Total estimated cost of contract = % of completion

Step: 3. Compute gross profit earned (profit to date)
Step 1 x step 2 = PTD

Step 4. Compute gross profit earned for current year:

(PTD at current FYE) - (PTD at beginning of Period) = Current year to date GP

Note: An estimated loss on the total contract is recognized immediately in the year it is discovered.

Remember to reverse previous profit.

Answer 4

cost incurred = work done = % of job earned
Total expected cost = total expected work

Question 5

What are the indicators that an entity is a principal?

Answer 5

1. The principal is primarily responsible for fulfilling the contract
2. The entity has inventory risk and
3. The entity has the discretion in establishing the selling price for the goods or services

Question 6

When will an entity account for a contract as a financing arrangement?

Answer 6

When the repurchase price is equal to or more than the original price and the expected market value.

Question 7

When will an entity account for a contract as a lease?

Answer 7

When the repurchase price is less than the original price.

Question 8

When is a current asset reported under the percentage of completion method?

Answer 8

When accumulated costs plus estimated earnings on the contract exceed progress billings.

Question 9

when is a current liability reported under the percentage of completion method?

Answer 9

A liability is reported when progress billings exceed costs and estimated earnings.