Revenue recognition Flashcards
four criteria
1 - Evidence of arrangement
2 - Delivery/Service performed
3 - Price is fixed and determinable
4 - Collectability reasonably assured
When can rev. be recognized prior to sale?
Customer provides valid of payment AND conditions exist contractually guarantee sale.
Example - L-T contracts - gold production
Normal - point of sale recognition
all criteria at this point
When will most rev. recognized be deferred?
No valid promise for payment. Significant effort left on contract.
Example - real estate deals
Installment method
Each dollar received is part return of cost and part profit.
B/S example
A/R Total
Deferred Gross Profit % of sale profit
Net A/R other half % - cost of uncollectible acct
Db DGP
Cr RGP
Deferred Gross Profit %
= DGP/AR
Cost Recovery Method
collectibility is uncertain, conservative, same j/e as installment, no gross profit recognized until cost recovered
J/E Cost recover method
Db Sales
Cr COGS
Cr DGP
Sales with significant right of return
Profit not recognized until return privilege expired - unless six criteria met
First 5 similar to the realizable criteria. Sixth is if returns cannot be estimated at year end - then sales rev cannot be recognized until return privilege expired
Percent of completion
= cost incurred to date/est total project cost
Profit recognized is the fraction above *(total revenue - total cost projected)
Rev for year 2 = (remaining % complete * total) - rev yr 1
Shows as a debit to CIP
% of complete J/E
Db Const. in progress - costs from current yr Cr materials, cash... - same as CIP Db Const. A/R - funds billed Cr Billings on CIP - funds billed Db Cash - funds received Cr Const A/R - funds received Db Const Exp (given in problem) Cr CIP (% of complete project) Db Const Rev (sum of 2 above)
Db Const exp (given in problem)
Db CIP (fraction done * total) - last year CIP
Cr Const. rev (sum of 2 above)
Completed contracts
No profit recognized until project done
Construction in progress
= costs incurred + profit
asset account
Billings
contra construction account
When CIP (asset acct) exceeds billings, no current liabilities.
Contract losses
single period = total estimated profit decreases during period
overall loss = contract no longer profitable
