Ch18 part 2 - Chapter 18 Revenue Recognition Part 2 AIM 33310U1 Summer 2009 Xinyi Lu Chapter 18 Part 2 1 Revenue Recognition After Delivery In some

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  Chapter 18. Part 2 1 Chapter 18: Revenue Recognition  Part 2 AIM 3331-0U1 Summer 2009 Xinyi Lu
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  Chapter 18. Part 2 2 Revenue Recognition  After Delivery In some cases, the collection of the  sales price is not reasonably assured  and revenue recognition is deferred. Installment-sales method  and  Cost- recovery method  are two methods to  defer revenue recognition until cash is  received. 
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  Chapter 18. Part 2 3 Installment-Sales Method Installment sales : any type of sale for which  payment is required in periodic installments over an  extended period of time. The risk of loss resulting from uncollectible accounts  is greater in installment sales transactions than in  ordinary sales, since the payment is spread over a  relatively long period. Seller can protect themselves by using a conditional  sales contract or a chattel mortgage. Seller can  “repossess” the goods sold if the purchaser defaults  on one or more payments.
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  Chapter 18. Part 2 4 Installment-Sales Method (cont.) Under the installment-sales method of accounting,  companies  defer income recognition  until the period of  cash collection. Revenue and cost of goods sold are recognized in  the period of sale. Only gross profit recognition is deferred  until the  period of cash collection.  This procedure has exactly the same effect as deferring  both sales and cost  of sales, but it requires only one  deferred account rather than two.
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  Chapter 18. Part 2 5 Acceptability of the Installment Method Except in special circumstances , the  installment method of recognizing revenue is   not acceptable Special circumstances: there is no reasonable  basis of estimating the degree of collectibility, or  sales of real estate, etc. The rationale is: the installment method  recognize no income until cash is collected, it is  not accordance with the accrual accounting  concept.
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Chapter 18. Part 2 6 Procedure for Installment Method For the sales in any one year: 1. During the year, record both sales and cost of sales in  the regular way; 2. At the end of the year, use “ Deferred Gross Profit ”  account to close installment sales and cost of  installment sales for the year; 3. At the end of the year, compute the rate of gross profit  on installment sales transactions, and apply this rate to  the cash collections of the current year’s installment  sales, to arrive at the realized gross profit. 4. Defer to the future years the gross profit not realized.
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This note was uploaded on 08/06/2009 for the course BUSINESS 4444 taught by Professor Dr.dale during the Spring '09 term at University of Texas at Dallas, Richardson.

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Ch18 part 2 - Chapter 18 Revenue Recognition Part 2 AIM 33310U1 Summer 2009 Xinyi Lu Chapter 18 Part 2 1 Revenue Recognition After Delivery In some

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