Revenue Recognition pg 449-

Question 1

Methods of Revenue Recognition

Answer 1

METHOD LAST CRITERION TO BE MET

1. Pt of Sale: Seller performance (providing good)-earned
2. Installment Method: Receipt of Cash-realizable
3. Cost Recovery Method: Receipt of cash in amt of cost- realizable
4. % of completion Method: Seller performance (work is progressing) earned
5. Completed Contract Method: Seller performance (completion)- earned
6. Sales w/ right of return: Expiration of return right or ability to estimate returns - earned

Question 2

Installment Method

Answer 2

-Basis is version of cash basis of accting. Employed when either the collectibility of receivable might be questionable OR if receivables will be collected over extended time period
- When applying IM gross profit % is calcualted for merchandise sold= (sales-COGS)/sales
> Cash collected divided b/w recovery of cost and gross profit received. Amt to gross profit is (cash received x gross profit %)

Question 3

Repossession

Answer 3

Under installment method: remaining receivable and deferred gross profit are closed, repossessed inventory is recorded at Fair Value, and gain/loss recorded

Question 4

Biological & Agricultural Assets

Answer 4

When future economic benefits probable and can be reliably estimated for assets, gains and losses from increases and decreases in FV (less estimated selling costs & taxes) are recognized as they occur, before sale takes place

Question 5

Cost Recovery Method

Answer 5

Gross Profit deferred until ALL cost is met. Once cost is met then all cash received there after is gross profit

Question 6

Revenue Recognized @ Completion of Production

Answer 6

-Products such as precious metals and certain ag products
- Three Conditions must be met:
> Relatively stable market for products
> Any related marking costs nominal
> Unites produced must be homogenous
- Allows revenue recognition take place before sale bc @ completion of project usual uncertainties (as to sale and collection of cash) are absent

Question 7

Sale w/ Right of Return

Answer 7

• Amt of sales recognized for period depends on if 6 criteria are met. If met sales recognized @ pt of sale, if 6 criteria not met recognized after pt of sale when return privilege expires.

Question 8

Six Criteria for Sale w/ Right of Return

Answer 8

1. Seller’s price to buyer substantially fixed/determinable @ date of sale
2. Buyer has pd seller or obligated to pay seller and obligation not contingent on resale of product
3. Buyer’s obligation to seller not changed in event of theft, physical destruction, or damage to product
4. Buyer acquiring product for resale has economic substance apart from that provided by seller
5. Seller doesn’t have significant obligation for future performance to directly bring about resale of product by buyer
6. Amt of future returns can be reasonably estimated

Question 9

Initial Franchise Fee

Answer 9

• Recognize when services (training/constructing) are preformed.
• If questions about uncollectibility use installment or cost recovery method to recognize fees
• If services/goods related to fee will be provided over extended time period use percentage of completion or completed contract method to recognized fees

Question 10

Milestone Method for R&D Arrangement

Answer 10

• Pmt to firm conducting research may be contingent on achieving milestone events (successful completion of testing phase). Recognition of pmts as revenue in entirety in yr milestone is achieved. (must meet 3 criteria to be considered achieving milestone

Question 11

3 Criteria to Meet Milestone w/ Milestone Method

Answer 11

1. Be in line w either a.)vendor’s performance in achieving milestone OR b.) enhancement of value of item delivered as result of achieving milestone
2. Relate only to work already preformed
3. Be reasonable relative to all deliverables & pmt terms in arrangement

Question 12

Contract Accting

Answer 12

Two Methods:

1. Completed Contract Method: No profit recognized until project complete–used if cannot estimate degree of completion @ interim periods
2. Percentage of Completion: Profit recognized in proportion to degree of completion–MUST be used if estimates to degree of completion measurable, AND reasonable est of total proj cost made, AND buyer & seller can be expected to perform under contract

Question 13

Construction in Progress Acct

Answer 13

-Inventory Acct = Current Asset Account
- Debited only when costs are incorporated into project, NOT MATERIAL-that’s recorded in material acct (when profit recorded in percentage of completion it increases CIP acct)
-BILLINGS ACCT = Contra Acct to Construction in Progress
>If CIP exceeds cumulative billings to date, net diff is
a current asset called Excess of construction in
progress over billings on contracts
>If Billings exceed CIP diff is disclosed in current
liability section

Question 14

Losses on Contracts

Answer 14

-Overall losses or Single Period Losses
> Single Period Losses are treated exactly same way as
profit during yr for both Completed Contract and
Percentage of completion methods
> Overall Losses for both methods GAAP requires loss
be recognized in full (happens when total costs
exceed contract price

Question 15

Cost-Plus Contracts (IFRS)

Answer 15

Total Cost of project is variable w/ customer taking risk for cost increases. Amt revenue recognized by contractor in any period is cost incurred plus agreed-upon percentage markup above cost