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Revenue Recognition Solutions

Revenue Recognition Solutions - ACC415 Solutions Winter...

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ACC415 Solutions Winter 2008 Revenue Recognition Solutions BRIEF EXERCISE 6-1 The exchange of the parcels of land is a barter transaction, which and lacks commercial substance. The exchange is non-monetary as no cash is exchanged. The objectives involved in of owning the property, for each real estate developer involved remains unchanged following the exchange. Since T t he developers have obtained properties, which that will yield them equivalent amounts of revenue when sold, or developed. T , t heir respective financial condition has essentially not substantially changed. The future cash flows derived from the property properties are not expected to change in terms of timing, amount and/or risk iness . Section 3861.06 of the Handbook recommends the exchange be recorded at the carrying value of the assets exchanged. Consequently no revenue is triggered by this barter transaction. The property obtained by each developer is recorded at the carrying value (book value) of the property given up. BRIEF EXERCISE 6-11 Current Assets Instalment Accounts Collectible in 2010 $ 245,000 Instalment Accounts Collectible in 2011 240,000 $485,000 Current Liabilities Deferred Gross Profit $ 214,100 EXERCISE 6-1 (a) 1. Since the sales effort is not complete until the flight actually occurs, revenue should not be recognized until December. 2. If collection can be reasonably assured and an estimate of uncollectible amounts can be made, then revenue can be recognized at the point of sale. Otherwise, the instalment method must be used with gross profit being recognized at the time cash is collected. However, it is highly unlikely that Leon’s would sell to customers with no credit check and that it would not be able to reasonably estimate its doubtful Page 1 of 26
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ACC415 Solutions Winter 2008 accounts based on past experience. Consequently, the instalment method of accounting is not a likely option. (Note No. 1 to the financial statements titled: Summary of Significant Accounting Policies” for Leon’s does not mention the recognition of sales made on an instalment basis. The only mention of revenue recognition is at point of sale. It is possible that financing arrangements for instalment sales are made in other corporate entities Leon’s deals with.) 3. Revenue should be recognized on a per game basis over the season from April to October. 4. Interest revenue should be accrued and recognized by TD Canada Trust evenly over the term of the loan. 5. Once the term starts, tuition can be recognized provided that material expenses can be determined and matched. 6. Revenue should be recorded at the time the sweater is shipped to the customer provided there is reasonable assurance of collectibility. (b) The ticket fee that is paid upfront should not be recognized as revenue unless the earnings process is substantially complete i.e. Air Canada has earned it by providing the flight. This is the case even if the fees are non-refundable and cannot be used at any other service but the specific flight scheduled on the ticket.
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