ACCT 3110 CH 5

ACCT 3110 CH 5 - Accounting 3110: External Financial...

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Accounting 3110: External Financial Reporting I Chapter 5: Income Measurement and Profitability Analysis (skip appendix)
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Revenue Recognition Principle Recognize revenue when: Earnings process is complete (earned), and Amount and timing of revenue are reasonably determinable (realized or realizable). Chapter 5 page 2
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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. Chapter 5 page 3
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Two Modifications Change when revenue is recognized: Before the earnings process is complete. After the earnings process is complete. Chapter 5 page 4
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Construction Accounting Chapter 5 page 5 Completed Contract Method Percentage-of- Completion Method Long-term Contracts
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Transactions During Period Chapter 5 page 6 Event Journal Entry Costs incurred Construction in Process (CIP) 1,000,000 Cash, etc. 1,000,000 Bill customers AR 900,000 Billings on CIP 900,000 Collect from customers Cash 750,000 AR 750,000
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Notice: New Accounts: Construction in Process (CIP) Billings on CIP Balance Sheet Presentation nets CIP and Billings If CIP is more then Billings, then an asset on BS If CIP is less then Billings, then a liability Chapter 5 page 7
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Revenue Recognition Differs Chapter 5 page 8 Completed Contract If job is profitable, there is no income statement impact until the job is complete. Entries to record revenue and expense and close-out accounts. Billings on CIP 4,500,000 Revenue 4,500,000 Costs of Construction 4,050,000 CIP 4,050,000
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Revenue Recognition Differs continued Percentage-of-Completion Revenue is recognized as contractor works on the job. Adjusting journal entry to accrue revenue: Chapter 5 page 9 CIP $ = Estimated GP Construction Expense $ = Incurred during year Revenue $ = Earned during year
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Percentage-of-Completion Revenue recognition is driven by the estimate of the percentage of the job that is complete. Chapter 5 page 10 Percent Complete = Costs incurred to date Current estimate of total costs
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Estimating GP with Percentage-of- Completion Chapter 5 page 11 Total contract price Total estimated costs Estimated gross profit on contract × Percent complete Gross profit earned on contract through current date Gross profit previously recognized Gross profit to recognize in current period
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This note was uploaded on 06/05/2011 for the course ACCT 3110 taught by Professor Snow during the Spring '11 term at Toledo.

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ACCT 3110 CH 5 - Accounting 3110: External Financial...

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