RevRec - Revenue Recognition Revenue A. Revenue Recognition...

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Unformatted text preview: Revenue Recognition Revenue A. Revenue Recognition Before Delivery 1. Long-term Construction Contracts a. Percentage-of-Completion Method--the percentage-of-completion method should be used when the estimates of progress toward completion, revenues, and costs are reasonably dependable and the following three conditions are met: (1) the contract clearly specifies the enforceable rights regarding goods or services provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement, (2) the buyer can be expected to satisfy all obligations under the contract, and (3) the contractor can be expected to perform the contractual obligation 1) Accounting a) Income Statement--revenue from long-term contracts and gross profit from long-term contracts are recognized each period based upon the progress of the construction I) Revenue From Long-term Contracts--revenue from longterm contracts is recognized each period to the extent of the excess of the total revenue from the contract multiplied by the costs incurred to date on the contract divided by the estimate of the total costs to complete the contract over the revenue from the contract recognized in prior periods II) Gross Profit on Long-term Contracts--gross profit on long-term contracts is recognized each period to the extent of the excess of the total estimated gross profit on the contract multiplied by the costs incurred to date on the contract divided by the estimate of the total costs to complete the contract over the gross profit on the contract recognized in prior periods A) Loss on Long-term Contracts--if cost estimates at the end of the current period indicate that a loss will result on completion of the entire contract, the entire expected contract loss should be recognized in the current period III) Construction Expense on Long-term Contracts-construction expense on long-term contracts is recognized each period for the difference between the revenue recognized each period from the long-term contract and the gross profit recognized each period on the long-term contract b) Balance Sheet--the balance in the billings on construction in process in account is subtracted from the balance in the construction in process account with the difference 1 reported as a current asset if a debit and a current liability if a credit I) Construction in Process--an inventory account, called construction in process is used to accumulate the construction costs incurred each period on the longterm contract and the gross profit recognized each period on the long-term contract II) Billings on Construction in Process--a contra inventory account, called billings on construction in process is used to accumulate the progress billings each period on the long-term contract c) Illustrations I) During year 1 a long-term construction contract was entered into at a contract price of $1,000,000; during year 1 construction costs of $150,000 were incurred and progress billings of $125,000 were received; on December 31 of year 1 the estimated cost to complete the contract was $600,000; during year 2 construction costs of $410,000 were incurred and progress billings of $625,000 were received; on December 31 of year 2 the estimated cost to complete the contract was $240,000; during year 3 construction costs of $230,000 were incurred to complete the contract and progress billings of $250,000 were received Year 1: Construction in Process 150,000 Cash 150,000 Cash Billings on Construction in Process Construction in Process (150,000 / (150,000 + 600,000)) x (1,000,000 750,000) Construction Expense Revenue From Long-term Contracts (150,000 / 750,000 x 1,000,000) Year 2: Construction in Process Cash 125,000 125,000 50,000 150,000 200,000 410,000 410,000 2 Cash Billings on Construction in Process Construction in Process (150,000 + 410,000 / (560,000 + 240,000)) x (1,000,000 - 800,000) Construction Expense Revenue From Long-term Contracts ((560,000 / 800,000 x 1,000,000) - 200,000) Year 3: Construction in Process Cash Cash Billings on Construction in Process Construction in Process ((1,000,000 - (560,000 + 230,000) - 50,000 - 90,000) Construction Expense Revenue From Long-term Contracts (1,000,000 - 200,000 500,000) 625,000 625,000 90,000 410,000 500,000 230,000 250,000 230,000 250,000 70,000 230,000 300,000 Billings on Construction in Process 1,000,000 Construction in Process 1,000,000 II) During year 1 a long-term construction contract was entered into at a contract price of $1,000,000; during year 1 construction costs of $150,000 were incurred and progress billings of $125,000 were received; on December 31 of year 1 the estimated cost to complete the contract was $600,000; during year 2 construction costs of $508,000 were incurred and progress billings of $625,000 were received; on December 31 of year 2 the estimated cost to complete the contract was $282,000; during year 3 construction costs of $285,000 were incurred to complete the contract and progress billings of $250,000 were received 3 Year 1: Construction in Process Cash Cash Billings on Construction in Process Construction in Process (150,000 / (150,000 + 600,000)) x (1,000,000 750,000) Construction Expense Revenue From Long-term Contracts (150,000 / 750,000 x 1,000,000) Year 2: Construction in Process Cash Cash Billings on Construction in Process Construction Expense Revenue From Long-term Contracts ((150,000 + 508,000) / (658,000 + 282,000) x 1,000,000) - 200,000) Construction in Process (658,000 / 940,000 x (1,000,000 - 940,000) 50,000) Year 3: Construction in Process Cash Cash Billings on Construction in Process 150,000 125,000 150,000 125,000 50,000 150,000 200,000 508,000 625,000 508,000 625,000 508,000 500,000 8,000 285,000 250,000 285,000 250,000 4 Construction in Process ((1,000,000 - (658,000 + 285,000) - (50,000 - 8,000)) Construction Expense Revenue From Long-term Contracts (1,000,000 - 200,000 500,000) 15,000 285,000 300,000 Billings on Construction in Process 1,000,000 Construction in Process 1,000,000 III) During year 1 a long-term construction contract was entered into at a contract price of $1,000,000; during year 1 construction costs of $150,000 were incurred and progress billings of $125,000 were received; on December 31 of year 1 the estimated cost to complete the contract was $600,000; during year 2 construction costs of $564,000 were incurred and progress billings of $625,000 were received; on December 31 of year 2 the estimated cost to complete the contract was $306,000; during year 3 construction costs of $310,000 were incurred to complete the contract and progress billings of $250,000 were received Year 1: Construction in Process 150,000 Cash 150,000 Cash Billings on Construction in Process Construction in Process (150,000 / (150,000 + 600,000)) x (1,000,000 750,000) Construction Expense Revenue From Long-term Contracts (150,000 / 750,000 x 1,000,000) Year 2: Construction in Process Cash 125,000 125,000 50,000 150,000 200,000 564,000 564,000 5 Cash Billings on Construction in Process 625,000 625,000 Construction Expense 570,000 Revenue From Long-term Contracts ((150,000 + 564,000) / (714,000 + 306,000) x 1,000,000) - 200,000) Construction in Process ((1,000,000 - 1,020,000) 50,000) Year 3: Construction in Process Cash Cash Billings on Construction in Process Construction Expense Revenue From Long-term Contracts (1,000,000 - 200,000 500,000) Construction in Process ((1,000,000 - (714,000 + 310,000) - (50,000 70,000)) 310,000 250,000 500,000 70,000 310,000 250,000 304,000 300,000 4,000 Billings on Construction in Process 1,000,000 Construction in Process 1,000,000 2) Disclosure a. The method of recognizing revenue should be disclosed b. The basis used to classify assets and liabilities as current (the nature and length of the operating cyscle) should be disclosed c. The effects of any revision of estimates should be disclosed d. The amount of backlog on uncompleted contracts should be disclosed e. The details about receivables (billed and unbilled, maturity, interest rates, retainage provisions, and 6 b. significant individual or group concentrations of credit risk) should be disclosed Completed Contract Method--the completed-contract method should be used only when an entity has primarily short-term contracts or when the conditions for using the percentage-of-completion method cannot be met or when there are inherent hazards in the contract beyond the normal, recurring business risks 1) Accounting a) Income Statement--revenue from long-term contracts and gross profit from long-term contracts are recognized only in the period in which the long-term contract is completed I) Revenue From Long-term Contracts--revenue from longterm contracts is recognized only in the period in which the long-term contractis completed II) Gross Profit on Long-term Contracts--gross profit on long-term contracts is recognized only in the period in which the long-term contract is completed A) Loss on Long-term Contracts--if cost estimates at the end of the current period indicate that a loss will result on completion of the entire contract, the entire expected contract loss should be recognized in the current period III) Construction Expense on Long-term Contracts-construction expense on long-term contracts is recognized for the difference between the revenue from the long-term contract and the gross profit on the long-term contract only in the period in which the long-term contract is completed b) Balance Sheet--the balance in the billings on construction in process in account is subtracted from the balance in the construction in process account with the difference reported as a current asset if a debit and a current liability if a credit I) Construction in Process--an inventory account, called construction in process is used to accumulate the construction costs incurred each period on the longterm contract and the gross profit recognized each period on the long-term contract II) Billings on Construction in Process--a contra inventory account, called billings on construction in process is used to accumulate the progress billings each period on the long-term contract c) Illustrations I) During year 1 a long-term construction contract was entered into at a contract price of $1,000,000; during year 1 construction costs of $150,000 were incurred and progress billings of $125,000 were received; on 7 December 31 of year 1 the estimated cost to complete the contract was $600,000; during year 2 construction costs of $410,000 were incurred and progress billings of $625,000 were received; on December 31 of year 2 the estimated cost to complete the contract was $240,000; during year 3 construction costs of $230,000 were incurred to complete the contract and progress billings of $250,000 were received Year 1: Construction in Process 150,000 Cash 150,000 Cash Billings on Construction in Process Year 2: Construction in Process Cash Cash Billings on Construction in Process Year 3: Construction in Process Cash Cash Billings on Construction in Process Construction in Process Construction Expense Revenue From Long-term Contracts 125,000 125,000 410,000 625,000 625,000 230,000 250,000 250,000 210,000 790,000 1,000,000 410,000 230,000 Billings on Construction in Process 1,000,000 Construction in Process 1,000,000 II) During year 1 a long-term construction contract was entered into at a contract price of $1,000,000; during year 1 construction costs of $150,000 were incurred and progress billings of $125,000 were received; on December 31 of year 1 the estimated cost to complete the contract was $600,000; during year 2 construction 8 costs of $508,000 were incurred and progress billings of $625,000 were received; on December 31 of year 2 the estimated cost to complete the contract was $282,000; during year 3 construction costs of $285,000 were incurred to complete the contract and progress billings of $250,000 were received Year 1: Construction in Process 150,000 Cash 150,000 Cash Billings on Construction in Process Year 2: Construction in Process Cash Cash Billings on Construction in Process Year 3: Construction in Process Cash Cash Billings on Construction in Process Construction in Process Construction Expense Revenue From Long-term Contracts 125,000 125,000 508,000 625,000 508,000 625,000 285,000 250,000 285,000 250,000 57,000 943,000 1,000,000 Billings on Construction in Process 1,000,000 Construction in Process 1,000,000 III) During year 1 a long-term construction contract was entered into at a contract price of $1,000,000; during year 1 construction costs of $150,000 were incurred and progress billings of $125,000 were received; on December 31 of year 1 the estimated cost to complete the contract was $600,000; during year 2 construction 9 costs of $564,000 were incurred and progress billings of $625,000 were received; on December 31 of year 2 the estimated cost to complete the contract was $306,000; during year 3 construction costs of $310,000 were incurred to complete the contract and progress billings of $250,000 were received Year 1: Construction in Process 150,000 Cash 150,000 Cash Billings on Construction in Process Year 2: Construction in Process Cash Cash Billings on Construction in Process Loss on Long-term Contracts (1,000,000 - (150,000 + 564,000 + 306,000)) Construction in Process Year 3: Construction in Process Cash Cash Billings on Construction in Process 125,000 125,000 564,000 625,000 564,000 625,000 20,000 20,000 310,000 250,000 250,000 310,000 Construction Expense 1,004,000 Revenue From Long-term Contracts 1,000,000 Construction in Process 4,000 (1,000,000 - (714,000 + 310,000) - 20,000) Billings on Construction in Process 1,000,000 Construction in Process 1,000,000 10 10 2) Disclosure a. The method of recognizing revenue should be disclosed b. The basis used to classify assets and liabilities as current (the nature and length of the operating cyscle) should be disclosed c. The effects of any revision of estimates should be disclosed d. The amount of backlog on uncompleted contracts should be disclosed e. The details about receivables (billed and unbilled, maturity, interest rates, retainage provisions, and significant individual or group concentrations of credit risk) should be disclosed B. Revenue Recognition After Delivery--in some cases, the collection of the sales price is not reasonably assured and there is no reasonable basis for estimating the degree of collectibility 1. Installment Method--the installment method should be used for retail land sales that meet the following three conditions: (1) the period of cancellation of the sale with refund of the downpayment and any subsequent payments has expired, (2) cumulative cash payments equal or exceed 10% of the sale value, and (3) the seller is financially capable of providing all promised contract representations a. Accounting 1) Income Statement a) Realized Gross Profit--gross profit is recognized each period to the extent of the collections of installment sales multiplied by the gross profit percentage on the installment sales I) Gross Profit Percentage--a gross profit percentage is computed for the installment sales of each period by separately recording the installment sales and installment cost of goods sold for each period II) Interest--interest on installment payments should be accounted for separately from the gross profit realized on the collection of installment sales b) Repossession--gain or loss is recognized for the difference between the fair market value of the repossessed merchandise and the uncollected installment sale less the deferred gross profit on the installment sale 2) Balance Sheet a) Installment Receivable--receivables from installment sales contracts should be reported by year of collectibility b) Deferred Gross Profit--deferred gross profit on installment sales should be reported as unearned revenue 11 3) Illustrations a) During year 1 inventory with a cost of $225,000 was sold on an installment basis for $300,000; during year 1 collections on installment sales were $150,000; during year 2 collections on installment sales were $100,000; during year 3 collections on installment sales were $50,000 Year 1: Installment Accounts Receivable, Year 1 300,000 Installment Sales 300,000 Cost of Installment Sales Inventory 225,000 225,000 Cash 150,000 Installment Accounts Receivable, Year 1 Installment Sales 300,000 Cost of Installment Sales Deferred Gross Profit, Year 1 Deferred Gross Profit, Year 1 37,500 Realized Gross Profit (150,000 x (300,000 -225,000) / 300,000) Year 2: Cash 100,000 Installment Accounts Receivable, Year 1 Deferred Gross Profit, Year 1 Realized Gross Profit (100,000 x 25%) 25,000 150,000 225,000 75,000 37,500 100,000 25,000 Year 3: Cash 50,000 Installment Accounts Receivable, Year 1 Deferred Gross Profit, Year 1 Realized Gross Profit (50,000 x 25%) b) 12,500 50,000 12,500 On January 1 of year 1 a corporation sold land costing $120,000 for a $50,000 downpayment and a $150,000, 3-year, 12 12 8% note; the installments and year 3 58,205 x note was to be repaid in 3 annual of $58,205 on December 31 of year 1, year 2, 2.57710 = 150,000 Cash Payment Payment 58,205 58,205 58,205 Ending Balance Balance 103,795 53,894 1 Amortization Schedule: Beginning Interest _Balance_ _Income_ _Balance_ _Income_ 150,000 + 12,000 103,795 + 8,304 53,894 + 4,312 Year 1: Cash Notes Receivable Land Deferred Gross Profit = = = 50,000 150,000 120,000 80,000 20,000 Deferred Gross Profit 20,000 Realized Gross Profit (80,000 / (50,000 + 150,000) x 50,000) Cash Interest Income Notes Receivable Deferred Gross Profit Realized Gross Profit (40% x 46,205) Year 2: Cash Interest Income Notes Receivable Deferred Gross Profit Realized Gross Profit (40% x 49,901) Year 3: Cash Interest Income Notes Receivable 58,205 12,000 46,205 18,482 18,482 58,205 8,304 49,901 19,960 19,960 58,205 4,311 53,894 13 13 Deferred Gross Profit Realized Gross Profit (40% x 53,894) 2. 21,558 21,558 Cost Recovery Method--the cost recovery method should be used for franchise sales and real estate sales where a high degree of uncertainty exists related to the collection of receivables a. Accounting 1) Income Statement a) Realized Gross Profit--gross profit is recognized each period to the extent of the collections of installment sales only after the cost of the installment sales is recovered I) Interest--interest on installment payments should be accounted for separately from the gross profit realized on the collection of installment sales b) Repossession--gain or loss is recognized for the difference between the fair market value of the repossessed merchandise and the uncollected installment sale less the deferred gross profit on the installment sale 2) Balance Sheet a) Installment Receivable--receivables from installment sales contracts should be reported by year of collectibility b) Deferred Gross Profit--deferred gross profit on installment sales should be reported as unearned revenue 3) Illustrations a) During year 1 inventory with a cost of $225,000 was sold on an installment basis for $300,000; during year 1 collections on installment sales were $150,000; during year 2 collections on installment sales were $100,000; during year 3 collections on installment sales were $50,000 Year 1: Installment Accounts Receivable, Year 1 300,000 Installment Sales 300,000 Cost of Installment Sales Inventory 225,000 225,000 Cash 150,000 Installment Accounts Receivable, Year 1 Installment Sales 300,000 Cost of Installment Sales Deferred Gross Profit, Year 1 150,000 225,000 75,000 14 Year 2: Cash 100,000 Installment Accounts Receivable, Year 1 25,000 100,000 25,000 Deferred Gross Profit, Year 1 Realized Gross Profit (150,000 + 100,000 - 225,000) Year 3: Cash 50,000 Installment Accounts Receivable, Year 1 Deferred Gross Profit, Year 1 Realized Gross Profit b) On January 1 $120,000 for 8% note; the installments and year 3 58,205 x 50,000 50,000 50,000 of year 1 a corporation sold land costing a $50,000 downpayment and a $150,000, 3-year, note was to be repaid in 3 annual of $58,205 on December 31 of year 1, year 2, 2.57710 = 150,000 Cash Payment Payment 58,205 58,205 58,205 Ending Balance Balance 103,795 53,894 1 Amortization Schedule: Beginning Interest _Balance_ _Income_ _Balance_ _Income_ 150,000 + 12,000 103,795 + 8,304 53,894 + 4,312 Year 1: Cash Notes Receivable Land Deferred Gross Profit Cash Interest Income Notes Receivable Year 2: Cash Interest Income Notes Receivable = = = 50,000 150,000 120,000 80,000 58,205 12,000 46,205 58,205 8,304 49,901 15 Deferred Gross Profit Realized Gross Profit (50,000 + 46,205 + 49,901 120,000) Year 3: Cash Interest Income Notes Receivable Deferred Gross Profit Realized Gross Profit 26,106 26,106 58,205 4,311 53,894 53,894 53,894 16 16 ...
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