RCJ4Ch03 - AdditionalTopicsin IncomeDetermination Chapter 3...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Additional Topics in  Income Determination Chapter 3
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
RCJ 2 Hot Seat Questions 1. When is it appropriate to recognize revenue before or after the point of sale? 1. What are aggressive accounting methods and conservative accounting methods? 1. Is earnings management really bad or good? 1. What techniques does a firm use to manipulate its income?
Background image of page 2
RCJ 3 Learning objectives 1. When is it appropriate to recognize revenue before or after the point of sale? 2. Revenue recognition details for long-term construction contracts, agricultural commodities, and installment sales. 3. Revenue principles for franchise sales, right of return, and “bundled” software sales. 4. How GAAP income determination invites “earnings management”, the various techniques used, and recent SEC guidance intended to thwart such activities. 5. How error corrections and prior period restatements are reported.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
RCJ 4 Recall the criteria for revenue recognition
Background image of page 4
RCJ 5 Revenue recognition prior to sale: Long-term construction projects A formal contract has been signed. The buyer is assured and the contract price is specified. Both revenue recognition conditions are satisfied prior to the time of sale. Condition 1: The critical event is actual construction, thus revenue is earned over time as the project progresses toward completion. Condition 2: Measurability is satisfied because there’s a firm contract with a known buyer at a set price. Construction costs can be estimated with reasonable accuracy so that expenses can be matched with revenues. Percentage-of-completion method : revenue is recognized in proportion to the “work done” each period.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
RCJ 6 Contract price is $1,000,000 and construction costs are estimated to be $800,000. Example: Solid Construction Corp. 2005 200 6 2007 Gross profit ? ? ? Total $150,000 Original estimate was $800,000 How much gross profit must be recognized each year?
Background image of page 6
RCJ 7 Percentage-of-completion for 2005 (Year 1) Step 1: Percentage of completion ratio 30% = $240,000 $800,000 = Cost incurred Estimated total costs Step 2: Estimated total contract profit $200,000 = $1,000,000 - $800,000 Step 3: Estimated profit earned to date $60,000 = $200,000 x 30% 1,000,000 800,000 30%
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
RCJ 8 30% $200,000 $60,000 Percentage-of-completion for 2006 (Year 2) Step1: Percentage of completion ratio Step2: Estimated total contract profit Step3: Estimated profit earned to date $150,000 = $1,000,000 - $850,000 $96,000 = $150,000 x 64% Step4: Incremental profit earned $36,000 = $96,000 - $60,000 30% $200,000 $60,000 $544,000 $850,000 = 64% $200,000 $60,000 1,000,000 850,000 64%
Background image of page 8
RCJ 9 Percentage-of-completion for 2007 (Year 3) Step1: Percentage of completion ratio 100% Step2: Estimated total contract profit Step3: Estimated profit earned to date Step4: Incremental profit earned $150,000 $150,000 $54,000 30% $200,000 $60,000 64% $150,000 $96,000 $36,000
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
RCJ 10 Percentage-of-completion: Journal entries
Background image of page 10
RCJ 11 Percentage-of-completion: Balance sheet presentation
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/21/2011 for the course ACCT 326 taught by Professor Joh during the Spring '11 term at San Diego State.

Page1 / 45

RCJ4Ch03 - AdditionalTopicsin IncomeDetermination Chapter 3...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online