Lecture+Note+chapter+6+with+answers

Lecture+Note+chapter+6+with+answers - Chapter 6 Revenue...

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Chapter 6: Revenue Recognition Read: Chapter 6, Appendix 6a (Franchises) In-class exercises: EX6-10, P6-11, EX6-23, EX6-4, EX6-17, EX6-3 Practice exercises: EX6-13, EX6-18 1
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Recognize revenue when BOTH conditions are met: 1) Collectability is assured 2) Performance is achieved Can measure revenue & costs Risks & rewards transferred from seller to purchaser Earnings process is substantially complete What is meant by the “earnings process”? Operational functions firm that ADD VALUE in generation of revenue Varies across different firm Eg. Produce goods→sale →collect cash→provide after sale service 2
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Recognize revenue at different stages in the earnings process 1) DURING PRODUCTION Many long term construction contracts 2) WHEN PRODUCTION IS COMPLETE (BEFORE SALE) Product with guaranteed price and buyer (eg. Some agricultural products where gov’t agrees to purchase excess at set price) 3) AT SALE/DELIVERY If revenue, cost, collection can be estimated Buyer assumes risks & rewards at this date Seller has no significant involvement/control of goods after this date How should you treat goods in transit? Risks & rewards are transferred where legal title passes Fob shipping point →sale complete when leaves seller Fob destination→ sale not complete until delivered 4) AFTER DELIVERY, WHEN CASH IS COLLECTED if collectability can’t be estimated 5) LATER THAN DELIVERY & CASH COLLECTION If seller has significant future obligations which can’t be estimated Trial period (allow returns) 3
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LONG-TERM CONTRACTS: Method Percentage of Completion Completed Contract When should this be used? If we can estimate ALL of: Contract revenue Collectability Costs to complete Progress to date If any of these CAN’T be estimated When is gross profit recognized? Each period record GP earned based on →input measures (eg. CTD/total cost) Or →output measures (eg. Engineer’s estimates of completion) When job is completed At what amount is inventory shown? Cost + GP to date (ie. Current exit price) cost What happens if contract is expected to be unprofitable? Recognize entire loss immediately same 4
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INSTALMENT SALES: Method Instalment Method Cost Recovery When is this method used? Can’t estimate collectability Can’t estimate collectability and/or future costs When to record GP? Record GP each period based on collections: (GP/sales x collections) Defer GP until all costs have been recovered I/S presentation Instalment sales -COGS GP -Deferred GP on this yr’s sales +realized GP on prior yrs’ sales GP realized this yr same B/S presentation Instalment A/R → from normal sales shown as current asset (regardless of due date) → from peripheral sales can show current (due within 1 yr)& noncurrent (due after 1 yr Instalment A/R Deferred GP shown either as: → contra to instalment A/R or → current liab same 5
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Example 1 Jan 1, year 1 sales contract is signed for $100,000 which had a total estimated cost of $40,000 (In 000s) Year 1 Year 2 Year 3 Total cost incurred 15 20 5 40 collections 20 25 55 100 billings 30 40 30 100 a)
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