Chapter 5 331

Chapter 5 331 - Chapter 5A Revenue Recognition ACCT 331...

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Chapter 5A Revenue Recognition ACCT 331 Revenue recognition: (The Realization Principle) 0. Revenue should be recognized (recorded) when 0. (1) The earnings process is complete (or substantially complete): The company has substantially accomplished all activities that it must, in order to be entitled to the revenue. 1. (2) Revenues are realized or realizable: Money is collected or ultimate collection is reasonably assured. 2. 1. Usually revenues are recognized when the goods are transferred (delivery) or services are provided. Deviations from Standard Revenue Recognition Procedures 0. What if the product is sold but is in transit to the buyer? 1. What if the product takes a long time to build and deliver? 2. What if there is great uncertainty regarding the collection of funds? Revenue recognition and Delivery: (Three Cases) 2. Case 1: Revenue recognized upon delivery . 0. Normal transactions identified earlier. 3. Case 2: Revenue recognized before delivery. 1. (A) Free on board shipping point. 2. (B) Percentage-of-completion method for long term construction contracts. 3. Case 3: Revenue recognized after delivery . 3. (A) Installment method. 4. (B) Cost recovery method Case 2A: Goods in transit: (Record revenues or not?): 1
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It depends on the shipping agreement. If the goods are shipped f.o.b (free on board) shipping point, then legal title of the goods are transferred to be buyer once the goods are shipped so the seller can record revenues when the items are shipped. If the goods are shipped f.o.b. destination, legal title is transferred once the goods are delivered so the seller has to wait until the products are delivered before revenues can be recorded. Case 2B: Revenue recognized before shipping. Long Term Contracts 4. Companies that depend on long-term contracts where the construction of some asset involves multiple periods (or installation or implementation of some software takes place over multiple periods), are usually allowed to record some revenue even before completion of the contract. 5. Usually in such cases the buyer makes a legal commitment to buy the goods or services. Often advances are made over time. 6. There are two method of accounting for long-term contracts: 0. Percentage of completion method. 1. Completed contract method. FASB’s Rules for Long term contracts 7. Accounting Research Bulletin 45: 5. Percentage-of-completion method can be used to record revenues from long term contracts. 8. Statement of Position 81-1: 6. Use percentage-of-completion method when all of the following conditions are met: 7. Reasonably dependable estimates can be made of the extent of progress towards completion, contract revenues and costs. 8. The contract provides enforceable rights regarding goods and services to be provided and received, consideration to be exchanged and manner and terms of settlement. 9.
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Chapter 5 331 - Chapter 5A Revenue Recognition ACCT 331...

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