Lecture07 - Lecture 7 Timing of Revenue Recognition 1...

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1 Lecture 7 Timing of Revenue Recognition
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2 Accounting for Sales Revenue The revenue principle requires that revenues be recorded when earned: An exchange has taken place. Collection is probable. The earnings process is nearly complete.
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3 What if production takes much longer? Long-term contractors Production spans multiple accounting cycles Percentage of completion method Using this method, revenue is recognized during the period of production – as work on the project progresses – rather than later, at the time of delivery.
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4 Recognize revenue from long-term contracts under the percentage of completion method if: The ongoing construction/production effort reflects the continuing earnings process for the project, and the cost of construction can be estimated reasonably accurately, and Cash collection is virtually assured
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5 Percentage of Completion Method Revenues and associated expenses from a long-term project are recognized during each accounting period on the basis of the progress made on the project during the period. How do we measure the progress made on the project?
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6 Measurement of progress and revenue allocation Estimated % of project completed to date = Actual cost incurred on the project to date Estimated Total Cost for the project
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7 Example Total revenue for the project (specified in the contract): $200,000 Total estimated cost to complete the project: $160,000 Actual Costs Incurred During Production: Year 1: $40,000 (25% of estimated total) Year 2: $80,000 (50% of estimated total) Year 3: $40,000 (25% of estimated total) The contract also requires that the customer make the
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This note was uploaded on 05/20/2010 for the course ACCT 101 taught by Professor Briancadman during the Spring '10 term at Penn College.

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Lecture07 - Lecture 7 Timing of Revenue Recognition 1...

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