Ch 07 revised with notes

Ch 07 revised with notes - 1 1 Recognized Recognized means...

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“Recognized” means recorded in the accounts. 2 The point of revenue recognition from selling products or a service is normally the date of sale or when service is provided. Revenue earned from allowing others to use company assets, i.e. ‘rent,’ is recognized as time passes. When revenue is recognized an asset* (either cash or accounts receivable if customer buys on account) and owner’s equity increases. A = L + RE + Stk accts *or a liability could decrease
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The percentage of completion and completed-contract methods are 4 4 4 methods of accounting for long-term construction contracts. The deposit method is used when cash is received in advance of physical transfer. For instance, a magazine publisher will increase cash and an unearned revenue account (a liability) when receiving cash from subscribers. The publisher record revenue and reduces the liability when the magazines are shipped (the point the revenue is earned). For products with ready markets where the sale is assured (e.g. commodities and agriculture products), revenue is recognized at the point of production (prior to physical transfer).
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Uncollectible accounts expense, sales returns and allowances, and warranty 5 expenditures are estimated based on past experience and as a percentage of sales, are fairly stable. If uncollectible accounts expense, sales returns and allowances, and warranty expenditures are large or varying from year to year, then perhaps recognition at the time of sale is not appropriate. If the company is not adequately estimating bad debt expense, then AR turnover is too low (because average net AR in the denominator is too high). Recall Net AR = Gross receivables less the allowance for uncollectible accounts. Gross Receivables $100,000 Less allowance for uncollectible accounts 2,000 Net AR $98,000 In this example, the company is owed $100,000 from its customers, but based on past experience estimates it will only collect $98,000.
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Estimated gross profit on entire contract = contract price – estimated total cost: 7 Contract price $420,000 Estimated total cost 360,000 (cost this year plus estimated cost to complete Estimated gross profit* $ 60,000 on entire contract *also called gross margin Percentage complete in 2009 = Cost incurred this year/estimated total cost = $240,000/$360,000 = 2/3 or 66.67% 2009 Income Statement would report Revenue $420,000 x 2/3 $280,000 Cost of Construction 240,000 (costs incurred this year = 2/3 of total costs Gross Profit $ 40,000 (2/3 of estimated total GP)
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This note was uploaded on 10/13/2010 for the course ACCT 5993 taught by Professor Gooch during the Fall '10 term at Cameron University.

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Ch 07 revised with notes - 1 1 Recognized Recognized means...

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