revenue recognition (to finish)

Question 1

how does the % of completion method of revenue recognition work?

Answer 1

The cumulative revenue to be recognized to date is the completion percentage multiplied by the total revenue to be collected.
cumulative revenue this period = completion percentage × total revenue
The current period revenue is the difference between the cumulative revenue to date and the cumulative revenue last period (i.e., the revenue already recognized in prior periods).
revenue this period = cumulative revenue this period – cumulative revenue last period
The expense (cost of sales) recognized along with the revenue is the actual cost incurred during the period.

Question 2

what is an exception to the principles of revenue recognition of % completion?

Answer 2

Exception: If total expected cost ever exceeds total revenue (on the contract as a whole), then in the period we find out, revenue is set so that profit-to-date equals the expected loss on the contract. (Why?)

Question 3

how does cost recovery method work? when is it used?

Answer 3

If no reliable measure of progress is available, the company can only recognize revenue
up to the amount of costs incurred to date; and
only if these costs are recoverable (i.e., the payments from the customer are expected to be at least enough to cover the costs).
This method is called the cost recovery method.

Question 4

what if payments under contract are unrelated to the % of completion revenues?

Answer 4

Notice that the recognition of revenue and expenses is not tied to cash payments, so we need accrued and deferred revenue accounts to store any temporary differences between cash flow and income.
Transferred goods and services are recognized as accrued revenue in a contract asset account, often called construction-in-progress (CIP) or unbilled services, depending on the industry.
Amounts billed to the customer are recognized as deferred revenue in a contract liability account, often called progress billings.
The balance sheet shows the net amount of the two, either
as a contract asset (accrued revenue) if accrued revenue > billings, or
as a contract liability (deferred revenue) if accrued revenue < billings.