Revenue Recognition

Question 1

Using percentage of completion, when is recognized as current asset?

Answer 1

If the sums of cumulative costs incurred PLUS cumulative gross profit recognized (CIP) EXCEEDS cumulative billings. CIP > progress billings

Question 2

Using percentage of completion, when is recognized as current liability?

Answer 2

If the sums of cumulative costs incurred PLUS cumulative gross profit recognized (CIP) LESS than the cumulative billings. CIP < progress billings

Question 3

What is construction in progress (CIP) using % of completion?

Answer 3

CIP = cost incurred + estimated gross profit earned to date

Question 4

What is construction in progress (CIP) in completed construction method?

Answer 4

CIP = cost incurred

Question 5

What is incremental costs of obtaining a contract?

Answer 5

costs are incurred that would not have been incurred if the contract had not been obtained. Ex: commission costs would not have been incurred if an contract had not been obtained

Question 6

what is a financing arrangement transaction?

Answer 6

When the repurchase price is equal to or greater than the original sale price and the expected market value

Question 7

How to allocate warranty cost if it can be sold separately?

Answer 7

It will be allocated based on separate cost % x total combined selling price

Question 8

How to calculate income/profit earned from long term construction using percentage of completion method?

Answer 8

• calculate total estimated cost of contract
• calc gross profit = contract price - estimated total costs
• calc % of completion = total cost to date / total estimated cost
• calc gross profit earned to date : completion % * gross profit
• calc profit earned for current year: profit earned to date - profit earned in previous years

Question 9

What accounting treat if PROFIT/LOSS incurred using % completion and completed methods?

Answer 9

• % completion: recognized right away for both profit and loss
• Completed: recognized right away if LOSS. Profit waits until complete

Question 10

When is revenue recognized using completed contract method?

Answer 10

Recognized when the job is done, NOT when progress billings are collected or when they exceed recorded costs