Revenues

Question 1

Installment Sales Basis

Answer 1

When…

1. collectibility questionable
2. Extended time period

Gross Profit formula - (sales-cogs/sales)

Amount of profit recognized = cash received in period * GP%

The rest goes to deferred GP = a contra receivable - Normal CR bal.

Question 2

IFRS Rev -

Answer 2

Recognized when..

• The amount of revenue and costs associated with the transaction can be measured reliably;
• It is probable that the economic benefits associated with the transaction will flow to the seller;
• For the sale of goods, the seller must have transferred to the buyer the risks and rewards of ownership, and does not effectively manage or control the goods (a significant right of return is an example);
• For the rendering of services, the stage of completion can be measured reliably.

Question 3

Cost Recovery Method

Answer 3

No GP reognized until the cost of the product is completely covered - More conservative than installment method but done for the same purposes

Question 4

Sales w/ a right of return - 6 criteria

Answer 4

Revenue is recognized at the point of sale if all of the following six criteria are met:
The seller’s price to the buyer is substantially fixed or determinable at the date of sale;
The buyer has paid the seller, or the buyer is obligated to pay the seller, and the obligation is not contingent on the resale of the product;
The buyer’s obligation to the seller would not be changed in the event of theft, physical destruction, or damage to the product;
The buyer acquiring the product for resale has economic substance apart from that provided by the seller;
The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer;
The amount of future returns can be reasonably estimated.

Question 5

When ALL 6 are met:

Answer 5

Reported net sales for the year equals total sales less actual returns on those sales during the year less estimated returns at year-end.
Accounts receivable is reported net of deferred gross profit on the estimated returns at year-end. The journal entries are similar to those for the installment method.

Question 6

goods on consignment

Answer 6

The owner of the goods (consignor) recognizes rev when the goods are sold by the consignee

NOT recognized when the consignor merely ships the goods to the consignee

Question 7

Franchise Fees - Initial

Answer 7

The initial franchise fee is recognized by the franchisor as revenue when all material services or conditions have been substantially performed or satisfied by the franchiser. These services include training of the franchisee and constructing the facilities, for example. The fee is recorded as unearned revenue until it is recognized as revenue. (accrual basis)

Question 8

Milestone Method for R and D Arrangements

Answer 8

Revenue is recognized at milestones only if the milestone meets the following criteria to be considered substantive (complete). The consideration earned by achieving the milestone must :
Be commensurate with either (a) the vendor’s performance in achieving the milestone, or (b) the enhancement of the value of the item delivered as a result of achieving the milestone. In other words, the consideration must in-line with the value provided by the vendor;
Relate only to work already performed;
Be reasonable relative to all deliverables and payment terms in the arrangement.

Question 9

The cost recovery (zero- profit) method

Answer 9

invoked when total project cost cannot be estimated, and also for any other reason causing completion of the contract to be uncertain.
Other causes include (1) a finding that the contract is not enforceable, (2) if completion is dependent on pending litigation, and (3) if the contractor cannot complete the contract due to internal problems such as pending bankruptcy.