Revenue Recognition

Question 1

Revenue Recognition

Answer 1

• Never credit payables until the goods in the order have been delivered or services rendered
  Deferred Revenues are credited at the time that cash is received

Question 2

Recognition Criteria

Answer 2

• Point of sale
  
  • Production of inventory - recognize prepayment
  • Percentage of completion - long term contract
  • Passage of time - rent, interest
  • Completion of production - before sale - when product is readily salable at determinable prices without significant effort
  • Completed Transaction - in exchange for noncash assets
    Installment basis - cash is collected

Question 3

Operating Profit

Answer 3

• Take into account the estimated returns and operating costs
  Not the entire right to return amount stated in the agreement, but the overall estimated for rev rec purposes

Question 4

Installment Sales

Answer 4

• Gross profit on sales is deferred and recognized as cash is actually collected
  
  • Gross profit % = realized gain/ Contract Price
  • GP % is multiplied by any cash received to determine the gain to be included in net income
  • Calculation: Gross profit is recognized in proportion to cash collected
  • Def GP = Installment Receivable * GP %
    ○ GP % - (Installment Sales - GP)/ Installment Sales
    ○ Compute total expected GP by Installment sale amount - COGS
    ○ Compute GP % profit rate by Total Gross Profit/Sale Amount
    For each period, multiply cash collected times the GP % in the period the sales were made to get that period’s GP

Question 5

Long Term Liabilities

Answer 5

• Recorded on a present value basis = sum of future payments discounted at an appropriate rate of interest
  
  • Related discount or premium should be amortized using the interest method
    Unamortized amount should be reported on the BS as a direct reduction from or addition to the face amount of the liability

Question 6

Interest Revenue

Answer 6

Difference between the future payment amount and the present value of that future payment amount

Question 7

Gross Profit %

Answer 7

Gross Profit/ Sales

Question 8

Discontinued Operations

Answer 8

• Separate line of business
  
  • Operating results from beginning period included in the income statement to the measurement date are reported as the gain (loss) from the operation of a discontinued segment net of income taxes
    
    • Includes not only this year, but all prior years included in the income statement with each in the year realized
  • Amount includes:
    
    • Results of operations of the component during the period (rev - exp)
    • Impairment loss recognize in writing down component to fair value - cost to sell
    • Gain for subsequent increase in fair value less cost to sell
      § Gains cannot exceed the cumulative less previously recognized for write down
      Gain or loss not previously recognized from results of sale of a component

Question 9

Completed Contract Method

Answer 9

Though you don’t recognize revenue until a profit has been made, you must recognize a loss as soon as it is known in the income statement

Question 10

Percentage of Completion Method

Answer 10

• Costs incurred to date/ Total Estimated costs
  
  • Estimated Income = Percentage of Completion * Estimated Profit on Each year
  • Total Income on contract = Total Contract Revenue - Total Estimated costs (based on each year)

Question 11

Note Payable/ Cost of Merchandise

Answer 11

• Cost of merchandise purchases should always be based on the present value of the note used to pay for it, not the face amount
  
  • If a notes present value is higher than its face amount, then the higher value should be added to purchase cost
  • Purchases increase costs of goods sold
    If this is not the case, then cost of goods sold is understated, which means that net income is overstated and retained earnings will be reported incorrectly

Question 12

Income from Continuing Operations

Answer 12

Prior to income tax