Spr10-CH 5_1 - RevenueRecognition SpicelandChapter5...

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Revenue Recognition Spiceland – Chapter 5
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Fundamentals Revenue represents positive inflows from activities  that are considered the main operations of the  company. Accrual accounting, in principle, requires that revenue  be recognized in the period or periods earned.
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Realization Principle Record revenue when:      AND there is  reasonable  certainty as to the  collectibility of the  asset to be  received (usually  cash). the earnings  process is  complete or  virtually  complete.
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Miscellaneous Terminology FOB destination – the buyer takes legal title to the goods sold once the  goods reach the buyer’s location. FOB shipping point – the buyer takes legal title once the goods are  shipped. Consignment – when a company (consignee) agrees to sell the  product of another company (consignor) in exchange for a portion of  the sales proceeds. During this process, the goods being consigned are legally owned by the  consignor and not considered Inventory on the consignee’s books.
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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. Collectability is reasonably assured.     
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Significant Uncertainty of  Collectibility 1. Installment Sales Method 2. Cost Recovery Method When significant or unusual   uncertainties about collectability exist,  revenue recognition is delayed.
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Installment Sales Violates accrual accounting principles by recognizing income during  the period cash is collected instead of the period in which the sale is  made. Used primarily in the real estate industry. Each future cash collection consists of two components: 1. Partial cost recovery 2. Partial gross profit (sales price above cost) Only the gross profit portion is recognized as income.
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Installment Sales Method On November 1, 2009, 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, 2009. The land cost $560,000 to develop. The company’s fiscal year ends on December 31. Gross Profit  $240,000 ÷ $800,000 = 30% Date Cash Collected Cost Recovery Gross Profit Nov. 1, 2009 $ 200,000 $ 140,000 $ 60,000 Nov. 1, 2010 200,000 140,000 60,000 Nov. 1, 2011 200,000 140,000 60,000 Nov. 1, 2012 200,000 140,000 60,000 Totals $ 800,000 $ 560,000 $ 240,000
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Installment Sales Method Description Debit Credit Installment sales receivable 800,000 Inventory 560,000 Deferred gross profit 240,000 Cash 200,000 Installment sales receivable 200,000 Deferred gross profit 60,000 Realized gross profit
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This note was uploaded on 11/03/2010 for the course ACCTG 321 taught by Professor Will during the Spring '08 term at San Diego State.

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Spr10-CH 5_1 - RevenueRecognition SpicelandChapter5...

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