Revenue Recognition Ch-5

Revenue Recognition Ch-5 - INCOME MEASUREMENT AND...

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5 - 1 INCOME MEASUREMENT AND RECOGNITION Dr. El-Gazzar– Fall2010 Realization Principle Deviations from Point of Delivery Industry Specific Rules Management Choice US versus IFRS Rules
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5 - 2 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. Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
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5 - 3 SEC Staff Accounting Bulletin No. 101 Staff Accounting Bulletin No. 101 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.
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5 - 4 Realization Principle Revenue recognition is often tied to delivery of the product from the seller to the buyer.
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5 - 5 U. S. GAAP vs. IFRS Earnings process is complete or virtually complete. Reasonable certainty as to the collectibility of the asset to be received. Revenue recognition criteria for U.S. GAAP and IFRS include: Revenue and costs can be measured reliably. Probable that economic benefits will flow to the seller. 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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5 - 6 Revenue Recognition at Delivery 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. Recognize Revenue
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5 - 7 Revenue Recognition After Delivery 1. Installment Sales Method 2. Cost Recovery Method When we are unable to make reasonable estimates of uncollectible amounts or customer returns of products, we delay recognizing revenue from the sale until the uncertainty has been resolved.
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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. Gross Profit  $240,000 ÷ $800,000 =  30% Date Cash Collected Cost (70%) Gross Profit (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 Amount Allocated to:
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This note was uploaded on 04/04/2011 for the course ACC 615 taught by Professor Semir during the Spring '11 term at Pace.

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Revenue Recognition Ch-5 - INCOME MEASUREMENT AND...

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