Revenue Recognition

Question 1

Identify the 5-step process for recognizing revenue

Answer 1

1. Identify the CONTRACT with the customers.
2. Identify the separate PERFORMANCE OBLIGATIONS in the contract.
3. Determine the TRANSACTION PRICE.
4. Allocate the transaction price to the separate PERFORMANCE OBLIGATIONS.
5. Recognize performance obligations when each PERFORMANCE OBLIGATION is satisfied.

Question 2

What are journal entries for the Percentage of Completion?

Answer 2

COSTS OF CONSTRUCTION
1. Construction in Process (Inventory)
Cash or A/P

PROGRESS BILLINGS
2. Accounts Receivable
Billings on contracts

COLLECTION ON BILLINGS
3. Collections on Billings
Cash

RECOGNITION OF INCOME
4. Construction in Process Inventory
Income on Construction**
**Closed to Income Summary

Question 3

What is the Deferred Gross Profit formula and how is this calculated?

Answer 3

I. Ending Balance of A/R x Gross Profit Percentage   
II. Sales - COS = GP
    Beg. A/R 
LESS Collection made
LESS Payments made (without interest)
    End. A/R
III. GP % x End. A/R