Revenue Recognition

Question 1

5 steps to revenue recognition

Answer 1

1 identify contract
2 Identify performance obligations 
3 determine transaction price
4 allocate price to obligations
5 recognize revenue when obligations met

Question 2

Contract approval can be

Answer 2

Written
Verbal
No writing or verbal, but standard industry practice

Question 3

Construction in progress

Progress Billings

Answer 3

CIP…Current asset
Progress Billings…Contra asset

The balance sheet nets these together
If progress Billings is higher than CIP then you have a current liability on the BS

Question 4

Entries for percentage of completion

First 3 entries always the same

Answer 4

D CIP
C cash

D acccts Rec - progress Billings
C progress Billings

D cash - payments received
C A/R to clear the acct rec

Question 5

Percentage of completion
Must calculate profit to date first
Fourth entry

Answer 5

D construction expenses ( the amount of CIP from the first entry)
D CIP the amount of profit earned so far
C revenue - a plug of the two above

Question 6

Percentage of complete

Calculation of profit to date

Answer 6

Amount of new CIP divided by total costs is percentage complete

Original contract amount minus total costs gives possible profit and then multiply by percentage complete