3311Ch05 - Sommers ACCT3311 CHAPTER5 Profitablity Analysis...

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Sommers–ACCT 3311 1 CHAPTER 5 Income Measurement and Profitablity Analysi Profitablity Analysis Realization Principle Record revenue when: AND there is reasonable certainty as to the collectibility of the asset to be the earnings process is complete or virtually complete. received (usually cash).
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Sommers–ACCT 3311 2 SEC Staff Accounting Bulletin No. 101 The SEC issued Staff Accounting Bulletin No. 101 to crackdown on earnings management . The bulletin provides additional criteria for judging whether or not the realization principle is satisfied: 1. Persuasive evidence of an arrangement exists. 2. Delivery has occurred or services have been performed. 3. The seller’s price to the buyer is fixed or determinable. 4. Collectibility is reasonably assured. U. S. GAAP vs. IFRS Revenue recognition criteria for U.S. GAAP and IFRS include: Earnings process is complete or virtually complete. Reasonable certainty as to the collectability of the asset to be Revenue and costs can be measured reliably. Probable that economic benefits will flow to the seller. received. Risk and rewards are transferred to buyer and seller does not manage or control the goods. Stage of completion can be measured reliably.
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Sommers–ACCT 3311 3 Completion of the Earnings Process within a Single Reporting Period Recognize Revenue When the product or service has been delivered to the customer and cash has been received or a receivable has been generated that has reasonable assurance of collectibility. Significant Uncertainty of Collectibility Wh tit i bt ll tibilit When uncertainties about collectibility exist, revenue recognition is delayed. 1. Installment Sales Method 2. Cost Recovery Method
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Sommers–ACCT 3311 4 Installment Sales Method On November 1, 2011, the Belmont Corporation, a real estate developer, sold a tract of land for $800,000. The sales agreement requires the customer to make four equal annual payments of $200,000 plus interest on each November 1, beginning November 1, 2011. The land cost $560,000 to develop. The company’s fiscal year ends on December 31. Cash Cost Gross Profit Amount Allocated to: Gross Profit $240,000 ÷ $800,000 = 30% Date Collected (70%) (30%) Nov. 1, 2011 $ 200,000 $ 140,000 $ 60,000 Nov. 1, 2012 200,000 140,000 60,000 Nov. 1, 2013 200,000 140,000 60,000 Nov. 1, 2014 200,000 140,000 60,000 Totals $ 800,000 $ 560,000 $ 240,000 Installment Sales Method During 2011, Belmont Corporation collected $200,000 on its installment sales. This entry records the Realized Gross Profit by adjusting the Deferred Gross Profit account.
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Sommers–ACCT 3311 5 Cost Recovery Method On November 1, 2011, the Belmont Corporation, a real estate developer, sold a tract of land for $800,000. The sales agreement requires the customer to make four equal annua agreement requires the customer to make four equal annual payments of $200,000 plus interest on each November 1, beginning November 1, 2011. The land cost $560,000 to develop. The company’s fiscal year ends on December 31.
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3311Ch05 - Sommers ACCT3311 CHAPTER5 Profitablity Analysis...

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