Chapter 18: Revenue Recognition I.

Apply the revenue recognition principle Revenue recognition the largest source of public company restatements over the past decade. Revenue recognition principle provides that companies should recognize revenue (1) when it is realized or realizable, and (2) when it is earned - Revenues are realized when a company exchanges G&S for cash or receivables - Revenues are realizable when assets a company receives in exchange are readily convertible to known amounts of cash or receivables. - Revenues are earned when a company has accomplished what it must do to be entitled to the revenues. Four revenue transactions are recognized in accordance with this principle: 1. Revenue from selling products recognized at date of sale (date of delivery) 2. Revenue from services provided recognized when services have been performed and are billable 3. Revenue from permitting others to use enterprise assets (interest, rent, royalties, etc.) recognized as time passes or as assets are used 4. Revenue from disposing of assets other than products recognized at the date of sale or trade-in Describe accounting issues for revenue recognition at point of sale (delivery) Revenue recognition at point of sale companies usually meet the 2 conditions for recognizing revenue by the time they deliver products or render services. Apply the percentage-of-completion method for long-term contracts Revenue recognition before delivery most notable in long-term construction contract accounting - 2 methods: 1. Percentage-of-completion method companies recognize revenues and gross profits each period based on the percentage complete. Must use POC method when ALL conditions apply: i. Estimates of progress toward completion, revenues, and costs are reasonably dependable ii. The contract has enforceable rights iii. The buyer can expect to satisfy all obligations under the contract iv. The contractor can be expected to perform the obligation Calculation of gross profit : GP = Contract Price Costs to date Estimated costs to complete Entries To record cost of construction: Construction in process XX Materials, cash payables XX To record progress billings: A/R XX Billings on construction in process XX To record collections: Cash XX A/R XX 2. Completed-contract method companies recognize revenues and gross profit only when the contract is completed.

II.

III.

IV. V.

Must use CC method when ONE of these conditions apply: i. Company has primarily short-term contracts ii. Company cannot meet the conditions for using the percentage-of-completion method iii. There are inherent hazards in the contract beyond normal, recurring business risks Apply the completed-contract method for long-term contracts See above III Identify the proper accounting for losses on long-term contracts Long-term contract losses: 2 types of losses 1. Loss in the Current Period on a Profitable Contract Using POC the estimated cost increase requires a current-period adjustment of gross profit recognized in prior periods Entry: Construction Expenses XX Construction in Process (Loss) XX Revenue from Long-Term Contracts XX Using CC company does not recognize a loss in current period 2. Loss on an Unprofitable contract Under both POC & CC the company must recognize the expected contract loss in the current period POC Entry: Construction Expenses XX Construction in Process (Loss) XX Revenue from Long-Term Contracts XX CC Entry: Loss from LT Contracts XX Construction in Process (Loss) XX Describe the installment-sales method of accounting Installment-sales method recognizes income in the periods of collection rather than in the period of sales. Explain the cost-recover method of accounting Cost-recovery method a company recognizes no profit until cash payments by the buyer exceed the cost of the merchandise sold

VI.

VII.