Revenue Recognition Flashcards
Which condition must be present in order for the contract modification to be accounted for as a separate contract?
The SCOPE of the original contract increases through the addition of distinct goods or services.
What has not been paid would be left accrued?
Unpaid would be accrued in the same year
Notes payable is a ________________ liability unless duration provided in the question
LONG TERM
Accounts payable are typically due within _______ (CL unless different duration is provided in the question)
30 to 60 days
Which account would be debited when preparing the JE to record billings in both the methods?
CONSTRUCTION RECEIVABLE
To record capitalized construction costs
Construction In Progress XX
Cash XX
To record billings (i.e. Invoices) sent to customers (Billings are a contra-asset account to CIP and relate specifically to the balance sheet). Billings do not trigger revenue recognition because they can occur throughout the contract including before and after the performance obligation has been satisfied.
Construction receivable XX
Billings on Construction Contracts XX
To record cash collected from customers
Cash XX
Construction Receivable XX
To close contract-related accounts upon completion of the contract
Billings on construction contracts XX
CIP XX
Gross profit / Total Cost
Gross profit % for point over time (total cost includes cost icurred to date + estimated costs)
Input method - Cost to cost approach
Cost incurred to work completed, % complete
The completed contract method for LT contracts is preferable over the percentage of completion method when lack of dependable estimates or inherent hazards cause _____
forecasts to be doubtful (ASC topic 605)
Calculation of cost incurred to date
1st step, = % completion * estimated cost at completion
second step(subtract previous year cost to calculate current year cost incurred)
Completed contract method, profit =
Revenue - Actual cumulative Cost of Yr 1 and Yr 2
JE when first payment of first product depends on the delivery of second product
2 steps involved when performance has been satisfied, then it will convert to AR
(1) Contract Asset with conditional rights should be debited
(2) Once performance has been satisfied, it will convert to AR
*Contract Asset with conditional rights
*Account receivable to be debited (AR reflects an unconditional right to payment)
When using % of completion method, the amount of income recognized in any year would be added to _______
CIP
JE when Revenue is recognized
CIP XX
Income on LT contract XX
When payment depends on condition to be fulfilled by e.g. June, one product deliverd in March 25, second to be delivered in June.
March 31 Balance sheet would show $6,000 of product A as CONTRACT ASSET
Contract asset to be reported to reflect the conditional nature of the asset
Gross Sales Revenue
Less: Sales Returns
Less: Sales Discounts
_________________________
Net Sales Revenue
Calc royalty income at Net Sales Revenue
Steps involved in Revenue Recognition (ISTAR mnemonic to remember)
- Identify the contract
- (Separate) Performance Obligation
- Transaction Price
- Allocate Transaction Price
- Recognize Revenue
EXPECTED VALUE to be used for e.g. Daily penalty wherever there a LARGE NUMBER OF POSSIBLE OUTCOMES. The expected value is the sum of probablity weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large no. of contracts with similar charateristics.
The MOST LIKELY AMOUNT to be used for SINGLE MOST LIKELY Amount in a range of possible consideration amounts. E.G. INCENTIVE BONUS
DO NOT RECOGNIZE REVENUE IN CASES where revenue is contingent (or there is a condition) upon reselling the goods
True
Non-cancellable contract
record as liability on the DATE when payment is DUE e.g. March 1
Cancellable contract
record as liability on the DATE when payment is advance is PAID e.g. March 31
The amount of VARIABLE CONSIDERATION that can be included in the transaction price is limited to only those amounts for which it is PROBABLE that a SIGNIFICANT REVERSAL of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variability is resolved.
In assessing whether it is porbable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty related to the variable consideration is subsequently resolved, the vendor will consider both the likelihood and the magnitude of the revenue reversal.
CONSIGNMENT
- Entity controls the product until a specified event occurs, such as the sale of the product to a customer of the dealer or until a sepcified period expires
- Entity is able to require the return of the product or transfer the product to a third party (such as another dealer)
- Dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit).
BILL AND HOLD
- Product must be identified separately as belonging to the customer.
- Product currently must be ready for physical transfer to the customer.
- Entity cannot use the product or to direct it to another customer.
- Susbtantive reason for the bill and hold arrangement (e.g. the customer has requested the arrangement)
Variable Consideration (NEW CHANGE IN AICPA)
Report as REFUNDABLE LIABILITY when Cash receipts exceed expected amount. E.g. $87,000 received when total cost (fixed+variable) was $85,000.
Std establishes constraint on amount of variable consideration that can be recognize because constraint designed to prevent an entity from recognizing revenues in one period only to reverse in subsequent period.
When applying constraint, entity should consider likelihood and magnitude of potential reversal.
Variable consideration is required to be reassessed each period such that the transaction price at the end of any given period reflects the circumstances at that time.
Nonrefundable payments (maybe income). Generally prepayments are _____________________
Recorded as a contract liability.
When the amounts require remittance to a third party, record as a liability.
When the likelihood that the customer will exercise the rights becomes remote if breakage is not expected or in proportion to the pattern of rights exercised by customers if breakage is expected (report as revenue).
